Download Marketing management

LESSON-1 MARKETING: NATURE, SCOPE AND
CORPORATE ORIENTATION TOWARDS MARKET
PLACE
STRUCTURE
1.0
Objective
1.1
Introduction
1.2
Definitions and meanings
1.3
Corporate orientations towards market place
1.3.1 The Production Concept
1.3.2 The Product Concept
1.3.3 The selling concept/sales concept
1.3.4 The marketing concept
1.3.5 The societal marketing concept
1.4
Marketing Management
1.5
Nature of Marketing
1.6
Scope of Marketing
1.7
Summary
1.8
Keywords
1.9
Self Assessment questions
1.10 References/suggested readings
1.0 OBJECTIVE
After reading this chapter, you will be able to understand the
meaning of marketing, its nature, scope and different philosophies. This
chapter also discusses the relationship of marketing to the other
organisational functions. It is essentially a foundation chapter and many
issues discussed here will be addressed in more details in later chapters.
1
1.1 INTRODUCTION
In the present day world ‘marketing’ is all pervasive. We are exposed
to marketing of products, services and ideas almost every day. The study
of marketing is very interesting in the sense that every body of us have
performed marketing activities in one form or other. For example, during
college days, working part time at a fast food restaurant to help fund one’s
own education or persuading parents to buy a new music system. When a
sales person engaged in selling a T.V., a doctor treats a patient or the
district administration asks its people to get their vehicles checked for
pollution, everybody is marketing something to the target audience.
Marketing is essentially about marshalling all the resources of an
organisation to meet the needs of the consumers on whom the entire
organisation depends. Although each of these examples are different, they
all have something in common; they consist a variety of marketing
activities. Many definitions have emerged to describe marketing activities.
1.2 DEFINITIONS AND MEANINGS
According to American Marketing Association “Marketing is the
process of planning and executing the conception, pricing, promotion, and
distribution of ideas, goods, and services to create exchanges that satisfy
individual and organisational objectives”.
Ramaswamy and Namakumari defines marketing “It is the total
system of interacting business activities designed to plan, promote and
distribute need satisfying products and services to existing and potential
consumers”.
Philip Kotler defines marketing “It is a social and managerial process
by which individuals and groups obtain what they need and want through
creating, offering and exchanging products of value with others”. This
2
definition of marketing is the most widely accepted by marketing educators
and practitioners. It highlights the core concepts like needs, wants,
demands, products, value, cost, and satisfaction.
So, we can conclude that marketing is the process of identifying the
needs of the target audience and provide the products accordingly in
exchange of some value. This process mainly consists of two parties. On
the one side, marketers are there who go to resource markets (raw material
markets, labour markets, money market, and so on) to buy these resources
and shape them into goods and services for their target consumers. On the
other hand, consumers are there who provide vital information to the
marketers besides money for using various products and services. This
simple process can be understood by the figure given below:
Communication
Goods & Services
Industry (a
collection of
Money
Market (a
collection of
Informatio
Source: Marketing Management by Philip Kotler
Therefore, marketing highlights the satisfaction of consumers needs
and wants and it has become evident that knowing consumer needs and
desires is a road to success for the marketers. But the scenario in
marketing has not been the same as we see today. Therefore, it is
imperative to go through the various orientations of marketing.
Marketing in Practice:
3
Do marketers create needs? If yes, can you think some of the
examples? If no, justify your answer.
1.3 CORPORATE ORIENTATIONS TOWARDS MARKET PLACE
The concept of marketing has evolved through different stages from
production orientation to societal orientation. The modern concept of
marketing highlights satisfaction of consumer needs and wants whereas
the societal concept cares for the well being of the consumer as well as that
of society. Let’s discuss these orientations/philosophies/concepts one by
one.
1.3.1 The Production Concept
It is one of the oldest philosophies in business. This concept views
that consumers will prefer those products that are widely available and
cheaper in cost. The organizations are production-oriented in nature and
try to achieve high production efficiency and emphasize on wider supply of
goods and services. This concept began in 1600s with the colonization of
America and continued till the later part of 19th century. In those days,
primary motive of the organizations was to make the product available to
consumers and to kept the price low.
In those days, the demand of products used to exceeds the supply.
In this particular situation consumers were more interested in obtaining
the products rather than its quality and features. The producers used to
enjoy the huge economies of scale and it was very difficult for the new
entrant to enter into the market as the existent marketers used to enjoy a
kind of monopoly situation. Henry Ford was the pioneer in the 1900s to
expand the automobile market on the basis of production concept by
providing his consumers only a single version of car i.e. T-model in black
colour. But the marketers, after a certain period of time, could not get the
best of consumer patronage. The reason was that the consumers were
4
motivated to seek varieties while purchasing. As a result, the production
concept fails to serve as the right marketing philosophy for the enterprises.
1.3.2 The Product Concept
The product concept assumes that consumers will buy the product
that offers them the highest quality, the best performance, and the most
features. A product orientation leads a company to try constantly to
improve the quality of its product. Under this concept, it is believed by the
managers that consumers prefer well-made products and can appreciate
better quality and performance. Organizations that are devoted to the
product concept of marketing, believe that consumers would automatically
favour for products of high quality. The managers of these organizations
spend considerable energy, time and money on research and development
to introduce quality and variations in products. However, some of the
managers are caught up in a love affair with their product and do not even
realise that the product is not required in the market. This particular
situation is described as ‘marketing myopia’ by the great philosopher of
marketing Professor Theodore Levitt. Marketing myopia means a wrong
and crooked perception of marketing and a short-sightedness about
business. It is in form of excessive attention to the quality of the product
thereby leaving other aspects without any due care. General Motors
designed a beautiful small-sized car with each and every attribute in it but
that was a total failure because at that time, that was not required by the
consumers. The marketers can add any kind of attribute to their products
but if the consumers are not aware of regarding the availability, how can
they go for purchasing that particular product. This phenomenon gave
birth to another concept i.e. selling concept.
1.3.3 The selling concept/sales concept
The selling concept is based on the assumption that consumers are
unlikely to buy a product unless and until they are actively and
5
aggressively convinced to do so. The idea was evolved through the views of
may academicians and practioners that unless you make your consumers
aware about the product or if he/she is not persuaded, the consumers may
develop a tendency to ignore your products. This philosophy maintains the
view that an organization can not expect its products to get picked up
automatically by the customers. The organization has to put certain
amount of efforts consciously to push its products. In this concept, the
firm makes the product first and then spells out how to sell it and make
profit. Aggressive advertising, personal selling, large-scale promotional
instruments like discounts and free gifts etc. are normally employed by the
organizations to rely on this concept. The problem with the selling
orientation is that it does not take consumer satisfaction into account. In
this situation, when consumers are compelled to buy products that they
don’t need and consequently unhappiness is likely to be communicated
through negative word-ofmouth that may dissuade other potential
consumers from making a similar purchase. Furthermore, when the
product or service is not in a position to fulfil the consumers’ needs, there
is a remote possibility of the repeat purchase.
1.3.4 The marketing concept
In the 1950s, some marketers started realising that they could sell
more products with more ease and comfort, if they produced only those
products which already had a place in the minds of the consumers. Instead
of trying to sell them the products that had already produced, marketingoriented firms strived to produce only those products which have been
produced according to the needs of the consumers. The marketing concept
emphasis that an organization should strive to satisfy the needs of the
consumers by identifying them and then produce the products accordingly
through a co-ordinated set of activities. Satisfying the customer should be
the major focus of all the organisational activities. Here instead of focusing
on quality or sale, consumer’s need and desired satisfaction become the
6
premise which is a must delivered phenomenon to be successful in the era
of competition. To identify unsatisfied consumer needs, organisations had
to go for extensive marketing research. While doing so, it was discovered
that consumers were highly complex individuals, possessing a wide variety
of innate and acquired needs. Hence, the study of consumer needs has
become the basis of another discipline also i.e. consumer behaviour.
1.3.5 The societal marketing concept
As our society moves through the 1990s, the marketing concept
continues to take on new meanings. The old and traditional concept of
marketing has emphasised and focused on the satisfaction of consumers’
needs and wants to meet the objectives and goals of the organisations. But
the ever changing scenario in the field of marketing brought in a third
consideration and that is the welfare of society. In this philosophy,
emphasis is being placed on how certain marketing activities and efforts
affect society as a whole in the era of limited resources, environmental
degradation and global competition. This philosophy puts a question mark
whether satisfying consumers’ need serve the long term intervals of the
society or not. Hence, the new concept emerged as the societal marketing
concept where it is emphasised that besides satisfying consumer needs,
long run societal welfare has to be considered by the marketers. The
marketers have to adopt social and ethical considerations into their
marketing practices. They must make a balance between the different
criteria of organization’s profits, consumer’s satisfaction and public
interest as a whole.
This section has dealt with the various philosophies of marketing
which describes how the field of marketing evolved through the periods.
Furthermore, a student of marketing must know about marketing
management at introductory level.
Now let’s discuss certain issues related to marketing management.
7
1.4 MARKETING MANAGEMENT
When marketers engage themselves in the exchange process with the
other parties, they have to go for a considerable amount of work which
require paramount skills on the part of the marketers. Marketing
management takes place when one party is more actively seeking an
exchange then the other party and also thinks about the means of
achieving perceived responses from the same. Many authors have strived
to define marketing management but the definition given by American
Marketing Association is widely recognised. The association defines
“marketing management is the process of planning and executing the
conception, pricing, promotion and distribution of ideas, goods, and
services to create exchanges that satisfy individual and organizational
goals”. From the given definition, it can be observed that marketing
management encompasses a set of diverse activities. These activities are
not limited to companies that produce physical goods but also includes
the organisations like universities, charities, hospitals and other services
organizations. Even wide range of individual activities are also considered
as the activities of marketing management. For example, earlier doctors
were reluctant to engage in marketing but due to ever increasing
competition they have also started using advertising and new means to
promote their hospitals and clinics. This marketing management involves
analysis, planning, implementation and control which covers the activities
related to goods, ideas and services. For that matter a student must know
about these terms i.e. product, goods, idea and services. As far as product
is concerned it may any good, service or idea that satisfies a need or want.
Good is a tangible item or object that can be seen and touched whereas
service is an intangible product which can be felt. Idea can be defined as
concept or philosophy. Non Government Organisations (NGOs) involved in
various issues like crime prevention, drug prevention and environmental
pollution etc., can be described as marketing ideas.
8
The marketing manager is someone who is perceived as demand
stimulator for the organization’s products. But actually his task is more
than this popular perception of the people. He has to look into the level,
timing and composition of demand in such a way so that the organization’s
objectives may be achieved. Through this discussion, it can be seen that
marketing management is eventually demand management. Marketing
managers can manage demand by carrying out research in marketing and
then planning the products accordingly. They also decide about target
markets, pricing, physical distribution and promotion of the product. The
eminent writer Philip Kotler has quoted eight different states of demand
and corresponding job of marketing managers there to. Let’s discuss there
different states of demand one by one.
(A)
Negative Demand: When a particular product is disliked by
the majority part of the market, it is a state of negative demand. Product
like vaccinations, heart surgery and dental work etc. are often avoided by
the consumers because of the negative feeling. The marketers task is to
redesign the promotional programme and is to reposition the products in
the mind of the consumers so that they are able to change their beliefs and
attitude of the target market.
(B)
No Demand: When the target consumers are either not aware
about the product or they are not interested in the product. For example,
an industrial house may not be aware about the new technology, and
college students of Haryana may not prefer English language course. The
marketers job is first to make the target audience aware then describe the
ways that what are the benefits of this product.
(C)
Latent Demand: There may be a kind of hidden demand for
certain products which is not satisfied with the existing available products.
In India, demand for fuel-efficient bigger size cars, harmless cigarettes and
cheaper houses for middle-class employees etc. are some of the examples
9
of the strong latent demand. The marketers’ job is to measures the size of
the potential market and take the effective steps towards providing goods
and services so as to satisfy the demand.
(D)
Declining Demand: Every product in its life-span faces
declining demand. This scenario is faced by every kind of organization i.e.
from physical goods providers to the service organisations. In these kind
of circumstances, the marketer has to look into the causes of decline in
demand and should see whether the same product can be carried on in
the same market with little modification or should the marketer diversify
in the other market to retain the aspect of profitability.
(E)
Irregular Demand: The demand of certain products varies on
the basis of seasonality. For example, zoos remain vacant during the
examination days of the students and overfull in the days of their summer
vacations. Hotels and resorts of certain hill stations are found in great
demand during summer but in the off-season, its difficult to find out a
single consumer. Here, the marketer’s job is to maintain the demand at
the same pattern. He has to find out certain ways like flexible pricing,
special schemes and discounts in off-season, and through different
promotional measures.
(F)
Full Demand: It is the happiest position for the marketers
because at this juncture their volume of business face full demand. In the
era of changing task and preferences of the consumers, marketer’s taste is
to maintain the current level of demand. Persisting with the quality
standards and investment in R & D should be the objectives at this level.
(G)
Overfull Demand: Sometimes a peculiar situation arises
when organisations face a demand that is higher than their existing
capacity. For example, traffic is sometimes overcrowded on a particular
place. Due to the announcement of rising in fuel prices by the government,
people develop the tendency of hoarding and this situation leads to overfull
10
demand. The marketer’s job in this situation is to reduce the demand on
the temporary basis by adopting the measure of increasing the prices. They
may also adopt the concept of ‘demarketing’
i.e. reducing promotion and service.
(H)
Unwholesome Demand: This demand relates to a particular
category of products like cigarettes, alcohol, drugs, and blue movies etc.
The marketer’s job is to make people aware about the fatal nature of these
products so that they can give up these products.
1.5 NATURE OF MARKETING
(a)
Marketing is customer oriented: Marketing begins and ends
with the customer. The job of the marketing is not only to satisfy the
consumer but even to delight him/her. All the activities of an organization
must be directed and focussed towards the consumer. The organisations
can not ignore emerging technologies, materials, instruments and new
ways of organizing the things but with the considerations of consumers.
Therefore, marketers must allow their customers to dictate product
specifications and standards regarding quality. This job can only be
performed if consumers’ needs are continuously monitored.
(b)
Marketing is the delivery of value: when a consumer derives
satisfaction from a particular product on the basis of product’s overall
capacity and performance is known as value in consumer’s perception. The
consumers today make a trade-off between cost and benefit of the product
and they consider the product’s value and price before making a decision.
At times they will have to give up a particular product to obtain the other
one since first one involves a big cost. Thus, he will choose the product
that gives him more value per rupee. According to De Rose, “Value is the
satisfaction of customer requirements at the lowest possible cost of
acquisition, ownership, and use”. Thus, the organisations’ strategies must
11
be aimed at delivering greater customer value than that of their
competitors.
(c)
Marketing is a net-work of relationships: The customer is
at the centre-stage and focus of all marketing activities. From 1990s
onwards the focus is not only to identify the needs and delivers it to
customers but is shifting towards relationships marketing. According to
Philip Kotler “Relationship marketing is the practice of building long-term
satisfying relations with key parties like customers, suppliers and
distributors in order to retain their long-term preference and business”.
The marketers who are smart enough to maintain their relationships by
delivering high quality products in time, better services and fair prices in
comparison with their counterparts.
(d)
Marketing as a separate discipline: There used to be the
days when marketing was treated as a part of economics. But now it is
recognised as a full-fledged separate discipline. It is not the time when we
just talk of sales and purchase or the quality of the product or the
monopoly. With the emergence of modern marketing concept, the issue of
green marketing and environmental protection have come up and
regarding that various laws have been framed. When we talk of knowing
consumer behaviour, it leads us to entirely a new world of human
behaviour and for that matter, a marketer must possess the knowledge of
psychology. Why a particular product is preferred by a consumer and other
declines it to use? The answer has in the study of culture. Therefore,
marketing has emerged as a separate discipline and got its strength from
the related areas like law, psychology, anthropology, sociology and
statistics etc.
(e)
Marketing is business: When it is said that marketing is
business, the contention is that the all activities starts from marketing i.e.
through knowing consumer and end up on the consumers i.e. knowing
12
consumer dissonance. It means the entire business revolves round the
marketing. According to Peter F. Drecker “Marketing is so basic that it can
not be considered as a separate function. It is the whole business seen
from the point of view of its final result, that is, from the customer’s point
of view. Business success is not determined by the producer but by the
customer”. So, business seeks customers because they are the business
providers and ultimately marketing is business.
1.6 SCOPE OF MARKETING
Marketing management has become the subject of growing interest
for everybody in today’s scenario. Therefore, it is of utmost importance to
discuss the scope of marketing. It can be understood in terms of functions
that a marketing manager performs. Let’s discuss some of the issues that
are undertaken by a marketing manager so as to elaborate the scope of
marketing.
(a)
Marketing Research: While sitting in a company’s office, no
one can identify the needs and wants of the consumers. For that purpose,
research has to be carried out in analysing the consumer’s needs, their
tastes and preferences, brand image of the product and effectiveness of
certain advertisements etc. These are the major areas of research where a
marketing manager requires information to be successful in market
because by knowing these information, he takes timely, accurate and
better decision. The marketing research not only gather information
regarding certain problem but also suggests corrective and action oriented
steps.
(b)
Product Planning and Development: A product is a bundle
of utility offered to consumers to satisfy their needs. Through marketing
research, a marketer is able to know the needs of the consumers but what
kind of storage and transportation is required, it depends upon the nature
of the product. Product must be according to the requirement and must
13
also be according to the paying capacity of the consumers. There are
number of decisions involved in this process like supplier of raw materia,
packaging, storage and distribution etc.
(c)
Pricing: One of the important functions of a marketing
manager is to determine the price of a product. Price is always influenced
by the cost, services attached to it, government policy, competitors prices
and marketer’s requirement of profit margin. A good pricing policy is a
significant factor to attract the consumers because price is the only ‘p’ of
marketing mix which generates revenue for the organisations.
(d)
Financing: Financing of consumer purchasing has become an
important part of modern marketing. The marketing manager plays an
important role in the finance department in this regard and consequences
thereto. In the era of global competition when there is fierce competition
and so many alternatives are available to a customer, certain finance
schemes have become an important device to increase the volume of sales.
Since the interest rates has come down significantly, financing facilities
have taken the shape of lubricants that facilitates the operation of the
marketing machine. In the era when the world economy is passing through
a great recession, these facilities help generating revenue for the respective
organisations and consequently are helping the economy to revive back
and for the consumers those who can afford to realise their dreams of
having a colour TV or small car, can fulfill their dreams through these
instruments of marketing.
(e)
Insurance: When goods and services are exchanged from one
hand to another, from one place to another place, a large number of risk
factors are involved. Marketing has now spread its arms to cover these
risks through insurance activities. National calamities like flood and
earthquake or damage of goods and services due to fire, theft or accident,
may cause big losses and can hamper the entire business. The various
14
insurance companies provide the protection against these risks by getting
a nominal amount of premium in return.
(f)
Advertising: In this era of competitive world, advertising has
become an important instrument in the hands of marketers. It makes the
consumer aware about the product, makes him curious about the product
and then force him for action and thus promote the sale. According to
American Marketing Association “Advertising is a paid form of nonpersonal presentation by an identified sponsor”. It is a nonpersonnel link
between a marketer and the consumer. Through advertising marketers are
able to position their products in the minds of the consumer through
various media like newspapers, magazines, television, radio, hoardings,
window display and internet etc.
Apart from the above areas there are many more business areas
where marketing activities have these vast scope but besides business
areas, marketing has its scope in the non-business or non-profit sector
also. A student who tries to occupy the front seat is also engrossed in doing
marketing. Churches, hospitals, colleges and universities are the other
non-profit sector where marketing activities are seriously performed.
1.7 SUMMARY
In the present day world ‘marketing’ is all pervasive. We are exposed
to marketing of products, services and ideas almost every day. The study
of marketing is very interesting in the sense that every body have performed
marketing activities in one form or other. Philip Kotler defines marketing
“It is a social and managerial process by which individuals and groups
obtain what they need and want through creating, offering and exchanging
products of value with others”. This definition of marketing is the most
widely accepted by marketing educators and practitioners. Therefore,
marketing highlights the satisfaction of consumers needs and wants and
15
it has become evident that knowing consumer needs and desires is a road
to success for the marketers.
The concept of marketing has evolved through different stages from
production orientation to societal orientation. It is one of the oldest
philosophies in business. This concept views that consumers will prefer
those products that are widely available and cheaper in cost. The
organisations are production-oriented in nature and try to achieve high
production efficiency and emphasize on wider supply of goods and services.
The product concept assumes that consumers will buy the product
that offers them the highest quality, the best performance, and the most
features. A product orientation leads a company to try constantly to
improve the quality of its product under the concept, it believed by the
managers that consumers prefer well-made products and can appreciate
better quality and performance.
The selling concept is based on the assumption that consumers are
unlikely to buy a product unless and until they are actively and
aggressively convinced to do so.
The marketing concept emphasises that an organization should
strive to satisfy the needs of the consumers by identifying them and then
produce products accordingly through a co-ordinated set of activities.
In the societal marketing concept it is emphasised that besides
satisfying consumer needs, long run societal welfare has to be considered
by the marketers.
Marketing management is the process of planning and executing the
conception, pricing, promotion and distribution of ideas, goods, and
services to create exchanges that satisfy individual and organizational
goals. There are different states of demand like Negative Demand, No
Demand, Latent Demand, Declining Demand, Irregular Demand, Full
16
demand, Unwholesome Demand. In the nature of marketing we include
differentiations like, Marketing is customer oriented, Marketing is the
delivery of value, Marketing is a net-work of relationships, Marketing as a
separate discipline, Marketing is business when it comes to scope of
marketing various issues are taken up like- Marketing Research, Product
Planning and Development, Pricing, Financing, Insurance, Advertising.
Apart from the above areas there are many more business areas where
marketing activities have vast scope, but besides business areas,
marketing has its scope in the non-business or non-profit sector also.
1.8 KEYWORDS
Needs: It refers to the state of felt deprivation. How individuals go
about satisfying a particular need is conditioned by the cultural values of
that society which he/she belongs to.
Wants: Wants are the specific satisfiers to satisfy a particular need.
For example, transportation is a need and a car is a satisfier.
Value: Value is represented by the ratio of perceived benefits to the
price paid. Value can be added by better specifying a product offer in
accordance with consumer’s expectations.
Market: Market consists of potential buyers and sellers where they
interact for an exchange process. Earlier people used to describe it as a
place only.
Marketing myopia: It means a wrong perception about marketing
where excessive attention is given to the quality without taking care of the
actual needs of the consumers.
1.9 SELF ASSESSMENT QUESTIONS
1.
What do you mean by marketing? Describe the feature of
marketing.
17
2.
Describe in detail the various philosophies of marketing.
3.
Define marketing management? Also discuss the various
levels of demand and the task of a marketing manager thereto.
4.
Do all companies need to practice the marketing concept?
Could you cite companies that do not need this orientation?
5.
Why is the study of marketing important to everyone? Discuss.
6.
Give an example of a good, service, and idea that you have
recently purchased.
1.10 REFERENCES/SUGGESTED READINGS
1.
Kotler, Philip, “Marketing Management– Analysis, Planning,
Implementation and Control”, PHI, New Delhi, 1997.
2.
Skinner, J. Stenen, “Marketing”, Houghton Miami Company,
Boston, 1990.
3.
Stanton, W.J., “Marketing Management”, Tata McGraw Hills
Publishers, 1996.
4.
Ramaswamy V.S., Namakumari, S., “Marketing Management
—Planning, Implementation and Control”, MacMillan India
Limited, New Delhi, 1995.
18
LESSON-2 THE MARKETING ENVIRONMENT AND
ENVIRONMENT SCANNING
STRUCTURE
2.0
Objective
2.1
Introduction
2.2
Definitions and meanings
2.3
Constituents of Marketing Environment
2.3.1 Internal Environment
2.3.2 External Environment
2.4
Environmental Scanning
2.5
Responding to Environmental Forces
2.6
Summary
2.7
Keywords
2.8
Self Assessment Questions
2.9
References/Suggested Readings
2.0 OBJECTIVE
The objective of this lesson is to acquaint the students about the
marketing environment and its various constituents. This chapter explores
the association between the different elements of a firm’s environment and
the ways in which it can respond to the existing and changing factors.
2.1 INTRODUCTION
Managers face difficult and exciting challenges today. A global
economy in which world-class quality is the ticket to ride, increased
diversity in the work force, and calls for more ethical conduct promise to
keep things interesting. The challenge for today’s and tomorrow’s
1
managers is to be aware of specific changes, along with the factors effecting
such changes and their likely impact on the business organisations. The
world is shrinking rapidly where cross-cultural skills are a must. Coverage
of product and service quality has been significantly increased. Diversity
among consumers has also increased by leaps and bounds where
managers are challenged to manage this diversity by keeping themselves
abreast of the latest happenings. Managers who know more than just
management
are
required
today.
Those
who
can
value
people,
communicate well, solve problems, see the big picture and work hard are
the precious human material wanted by the organisations. A manager, who
can visulalise these changes and understand the dynamic character of
marketing environment can survive in the industry.
2.2 DEFINITIONS AND MEANINGS
It refers to all external forces which have a bearing on the functioning
of the business. According to Barry M. Richman and Melvgn Copen
“Environment consists of factors that are largely if not totally, external and
beyond
the
control
of
individual
industrial
enterprise
and
their
managements. These are essentially the ‘givers’ within which firms and
their management must operate in a specific country and they vary, often
greatly, from country to country”.
William F. Glucck defines marketing environment “as the process by
which strategists monitor the economic, governmental, market, supplier,
technological, geographic, and social settings to determine opportunities
and threats to their firms”.
According to Skinner “Marketing environment consists of all the
forces outside an organisation that directly or indirectly influence its
marketing activities, includes competition, regulation, politics, society,
economic conditions, and technology”.
2
From the above definitions we can extract that marketing
environment consists of factors that are internal and external which may
pose threats to a firm or provide opportunities for exploitation.
In business all the activities are carried out to satisfy the needs of
the consumers. In other words, it is an activity carried out by the people
for the people which mean people occupy a central place around which all
the activities revolve. It means business is people and a human is always
a dynamic entity who believes in change and it may be right to say that the
only certainty today is change. It poses a huge challenge for today and
especially tomorrow’s businessmen and managers to be aware of specific
changes so as to keep themselves abreast of the latest happenings in the
field of business to ensure their survival and sustainability in the market.
Therefore, the study of marketing environment is of utmost importance for
the managers and practitioners.
2.3 CONSTITUENTS OF MARKETING ENVIRONMENT
Every business firm consists of a set of internal factors and it also
confronts with a set of external factors. The following figure gives a more
clear and comprehensive picture about the different factors. Marketing
Environment
Internal
External Environment
Environment
• Human Resources &
Internal Relationships
Micro Environment
• Consumers
Macro Environment
• Economic Factors
• Company Image
• Suppliers
• Political & Govt. Factors
• Management Structure
• Competitors
• Demographic Factors
• Physical Assets
• Middlemen
• Socio-cultural Factors
• R & D & Technological
• Publics
• International Factors
Capabilities
• Natural Factors
3
• Marketing Resources
• Financial Factors
2.3.1 Internal Environment
There are number of factors which influence various strategies and
decisions within the organisation’s boundaries. These factors are known
as internal factors and are given below:
(a)
Human Resources: It involves planning, acquisition, and
development of human resources necessary for organisational success. It
points out that people are valuable resources requiring careful attention
and nurturing. Progressive and successful organisations treat all
employees as valuable human resources. The organisation’s strengths and
weaknesses are also determined by the skill, quality, morale, commitment
and attitudes of the employees. Organisations face difficulties while
carrying out modernisation or restructuring process in form of resistance
of the employees. So, the issues related to morale and attitudes should
seriously be considered by the management. Moreover, global competitive
pressures have made the skilful management of human resources more
important than ever. The support from different levels of employees helps
the management in making decisions and implementing them.
(b)
Company Image: One company may issue shares and
debentures to the public to raise money and its instruments are over
subscribed while the other company make seek the help of different
intermediaries like underwriters to generate finance from the public. This
difference underlines the distinction between the images of the two
companies. The image of the company also matters in certain other
decisions as well like forming joint ventures, entering contracts with the
other company or launching new products etc. Therefore, building
company image should also be a major consideration for the managers.
4
(c)
Management Structure: Gone are the days when business
was carried out by the single entrepreneur or in the shape of partnerships.
Now it has reshaped itself into the formation of company where it is run
and controlled by the board of directors who influence almost every
decision. Therefore, the composition of board of directors and nominees of
different financial institutions could be very decisive in several critical
decisions. The extent of professionalisation is also a crucial factor while
taking business decisions.
(d)
Physical Assets: To enjoy economies of scale, smooth supply
of produced materials, and efficient production capacity are some of the
important factors of business which in turn depends upon the physical
assets of an organisation. These factors should always be kept in mind by
the managers because these play a vital role in determining the competitive
status of a firm or an organisation.
(e)
R & D and Technological Capabilities: Technology is the
application of organised knowledge to help solve problems in our society.
The organisations which are using appropriate technologies enjoy a
competitive advantage over their competitors. The organisations which do
not possess strong Research and Development departments always lag
behind in innovations which seem to be a prerequisite for success in
today’s business. Therefore, R & D and technological capabilities of an
organisation determine a firm’s ability to innovate and compete.
(f)
Marketing Resources: The organisations which possess a
strong base of marketing resources like talented marketing men, strong
brand image, smart sales persons, identifiable products, wider and smooth
distribution network and high quality of product support and marketing
support services make effortless inroads in the target market. The
companies which are strong on above-mentioned counts can also enjoy the
5
fruits of brand extension, form extension and new product introduction
etc. in the market.
(g)
Financial Factors: The performance of the organisation is
also affected by the certain financial factors like capital structure, financial
position etc. Certain strategies and decisions are determined on the basis
of such factors. The ultimate survival of organisations in both the public
and private sectors is dictated largely by how proficiently available funds
are managed.
So, these are some of factors related to the internal environment of
an organisation. These factors are generally regarded as controllable
factors because the organisation commands a fair amount of control over
these factors and can modify or alter as per the requirement of the
organisation.
2.3.2 External Environment
Companies operate in the external environment as well that forces
and shape opportunities as well as threats. These forces represent
“uncontrollable”, which the company must monitor and respond to. SWOT
(Strengths, weaknesses, opportunities and threats) analysis is very much
essential for the business policy formulation which one could do only after
examination of external environment. The external business environment
consists of macro environment and micro environment.
(A)
Micro Environment
It is the company’s immediate environment where routine activities
are affected by the certain actors. Suppliers, marketing intermediaries,
competitors, customers and the publics operate within this environment.
It is not necessary that the micro factors affect all the firms. Some of the
factors may affect a particular firm and do not disturb the other ones. So,
6
it depends on what type of industry a firm belongs to. Now let’s discuss in
brief some of the micro environmental factors.
(a)
Suppliers: The supplier to a firm can alter its competitive
position and marketing capabilities. These can be raw material suppliers,
energy suppliers, suppliers of labour and capital. The relationship between
suppliers and the firm epitomises a power equation between them. This
equation is based on the industry conditions and the extent to which each
of them is dependent on the other. For the smooth functioning of business,
reliable source of supply is a prerequisite. If any kind of uncertainties
prevail regarding the supply of the raw materials, it often compels a firm
to maintain a high inventory which ultimately leads to the higher cost of
production. Therefore, dependence on a single supplier is a risky
proposition. Because of the sensitivity of the issue, firm should develop
relations with different suppliers otherwise it could lead to a chaotic
situation. Simultaneously firms should reduce the stock so as to reduce
the costs.
(b)
Customers: According to Peter F. Drucker “the motive of the
business is to create customers”, because a business survives only due to
its customers. Successful companies recognise and respond to the unmet
needs of the consumers profitably and in continuous manner. Because
unmet needs always exist, companies could make a fortune if they meet
those needs. For example it is the era when we could witness the increasing
participation of women in the different jobs which has already given birth
to the child care business, increased consumption of different household
utilities like microwave ovens, washing machines and food processors etc.
A firm should also target the different segments on the basis of their tastes
and preferences because depending upon a single customer is often risky.
So, monitoring the customer sensitivity is a pre condition for the success
of business.
7
(c)
Competitors: A firm’s products/services are also affected by
the nature and intensity of competition in an industry. A firm should
extend its competitive analysis to include substitutes also besides
scanning direct competitors. The objective of such an analysis is to assess
and predict each competitor’s response to changes in the firm’s strategy
and industry conditions. This kind of analysis not only ensures the firm’s
competitive position in the market but also enables it to identify its major
rival in the industry. Besides the existing competitors, it is also necessary
to have an eye on the potential competitors who may enter the industry
although forecasting of such competitors is a difficult task. Thus an
analysis of competition is critical for not only evolving competitive strategy
but also for strengthening a firm’s capabilities.
(d)
Marketing Intermediaries: Marketing intermediaries provide a
vital link between the organisation and the consumers. These people
include middlemen such as agents or brokers who help the firm to reach
out to its customers. Physical distribution entities such as stockists or
warehouse providers or transporters ensure the smooth supply of the
goods from their origin to the final destination. There are certain marketing
research agencies which assist the organisation in finding out the
consumers so that they can target and promote their products to the right
consumers. Financial middlemen are also there who finance the marketing
activities such as transportation and advertising etc. A firm should ensure
that the link between organisation and intermediaries is appropriate and
smooth because a wrong choice of the link may cost the organisation
heavily. Therefore, a continuous vigil of all the intermediaries is a must.
(e)
Publics: an organisation has an interface with many publics
during its life time. According to Cherrunilam “A public is any group that
has an actual or potential interest in or impact on an organisation’s ability
to achieve its interests”. The public includes local publics, media and
action groups etc. The organisations are affected by certain acts of these
8
publics depending upon the circumstances. For example if a business unit
is establishment in a particular locality then it has to provide employment
to the localites at least to the unskilled labour otherwise local group may
harm that very business or they may interrupt the functioning of the
business. The media has also to be taken into confidence because in
turned hostile they may tarnish the image of the organisation
unnecessarily. Simultaneously media may disseminate vital information to
the target audiences. Action groups can also create hindrances in the name
of exploitation of consumers or on the issue of environmental pollution.
The business suffers due to their activities.
Therefore, their concerns should also be kept in mind. Albeit, it is
wrong to think that all publics are threats to the business yet their
concerns should be considered up to a certain level.
(B)
Macro Environment
With the rapidly changing scenario, the firm must monitor the major
forces like demographic, economic, technological, political/legal and
social/cultural forces. The business must pay attention to their casual
interactions since these factors set the stage for certain opportunities as
well as threats. These macro factors are, generally, more uncontrollable
than the micro factors. A brief discussion on the important macro
environmental factors is given below:
(a)
Demographic Environment: The first macro environmental
factor that businessmen monitor is population because business is people
and they create markets. Business people are keenly interested in the size
and growth rate of population across the different regions, age distribution,
educational levels, household patterns, mixture of different racial groups
and regional characteristics. For ensuring the success of the business
incessant watching of these demographic factors is a prerequisite. To enter
into a particular segment, a marketer needs to understand composition of
9
that segment with respect to different demographic factors in that very
segment so as to decide the optimal marketing mix and also take certain
strategic decisions related to it. For example, if the youth form a large
proportion of the population, it is but natural for firms to develop their
products according to the requirement of this group. Besides the age, it is
also necessary to break up population according to sex-wise and also the
role of women. Today we can observe that more and more women have
taken to work and professions and hence it can be seen that many time
saving appliances are available in the market. Each gender group has
different range of product and service needs and media and retail
preferences, which help marketers to finetune their market offers.
There is yet another dimension of population changes which a
businessman needs to address. For example, occupation and literacy
profile of the targeted segment. The higher literacy level will imply a more
demanding consumer as he is in the touch of the various media which
acquaint him with information, and on the other hand low literacy make
the marketers look for other method of communication. The occupation of
the population also affects the choice of the products and media habits.
Any significant irrigation of the population from one area to another, rural
to urban, is another important environmental factor which calls for the
marketer’s attention. For example, the movement from north-India to
South-India will reduce the demand for warm clothing and home heating
equipment on the one hand and will increase the demand for air
conditioning on the other hand. So, the companies that carefully analyse
their markets can find major opportunities.
(b)
Economic Environment: Besides people, markets require
purchasing power and that depends upon current income, savings, prices,
debt and credit facilities etc. The economic environment affects the
demand structure of any industry or product. The following factors should
10
always be kept in mind by the business people to determine the success of
the business.
(i)
Per capita income
(ii)
Gross national product
(iii)
Fiscal and monitory policies
(iv)
Ratio of interest changed by different financial institutions
(v)
Industry life cycle and current phase
(vi)
Trends of inflation or deflation
Each of the above factors can pose an opportunity as well as threat
to a firm. For example, in an under-developed economy, the low demand
for the product is due to the low income level of the people. In such a
situation a firm or company can not generate the purchasing power of the
people so as to generate the demand of the products. But it can develop a
low priced product to suit the low income market otherwise it will be
slipped out from the market. Similarly, an industry gets a number of
incentives and support from the government if it comes under the purview
of priority sector whereas some industries face tough task if they are
regarded as belonging to non-essential or low priority sectors.
In the industry life cycle, timing is every thing when it comes to
making good cycle-sensitive decisions. The managers need to make
appropriate cutbacks prior to the onslaught of recession because at that
time sales are bound to decline which leads to increasing inventories and
idle resources and that is costly. On the other hand, business people
cannot afford to get caught short during a period of rapid expansion. This
is where accurate economic forecasts are a necessity and therefore, a
manager must pay careful attention to the major economic changes.
(c)
Technological Environment: Technology is a term that ignites
passionate debates in many circles these days. According to some people
11
technology have been instrumental in environmental destruction and
cultural fragmentation whereas some others view that it has effected
economic and social progress. But no doubt, it has released wonders to
the world such as penicillin, open-heart surgery, family planning devices
and some other blessings like automobile, cellular phones and internet
services etc. It has also been responsible for hydrogen bomb and nerve gas.
But the businesses that ignored technological developments, had to go
from the world map. For example, in India, cars like Ambassador and
Premier had to go from the scene because of obsolete technology. Likewise,
containerised movement of goods, deep freezers, trawlers fitted with
freezers etc. have affected the operations of all firms including those
involved in seafood industry. Now it has been ensured that perishable
goods can be transported in a safer manner. Explosion in information
technology has made the position of some firms vulnerable. The life cycles
of the products have reduced and expectations of the consumers are
becoming higher and higher due to all these technological changes. To cope
up with this kind of scenario, a continuous vigil of the happenings and
adequate investment in R & D needs to be earmarked by the marketer.
Marketers must also be aware of certain government regulations while
developing and launching new products with latest technological
innovations.
(d)
Political/Legal Environment: Business decisions are strongly
affected by developments in the political and legal environment. This
environment consists of laws, regulations and policies that influence and
limit various organisations. Sometimes these laws create opportunities for
the business but these may also pose certain threats. For example, if the
government specifies that certain products need mandatory packaging
then it will boost the cardboard and packaging companies but it will add
to the cost of the product. Regulations in advertising, like a ban on
advertisement of certain products like liquor, cigarettes and pan masalas
12
and hoarding of food products, gas and kerosene are the reality of today’s
business. Business legislations ensure specific purposes to protect
business itself as well as the society from unfair competitions; to protect
consumers from unfair business practices and to protect the interest of
the society from unbridled business behaviour. In India business is
regulated through certain laws like Monopolies and Restrictive Trade
Practices Act, 1969 (MRTP Act), Foreign Exchange and
Regulation Act, 1973 (FERA), Partnership Act 1932, Consumer Protection
Act, 1986 (CPA), and Companies Act, 1956 etc. A businessman needs to
understand various policies and political ideologies because these have a
profound impact on the functioning and success of the business.
(e)
Social-cultural Environment: Society shapes the beliefs, values,
norms, attitudes, education and ethics of the people in which they grow
up and these factors exercise a great influence on the businesses which by
far are beyond the company’s control. All these factors are classified as
social-cultural factors of the business. The buying and consumption
pattern of the people are very much determined by these factors and cost
of ignoring the customs, tastes and preferences etc. of the people could be
very high for a business. Consumers depend on cultural prescriptions to
guide their behaviour, and they assume that others will behave in ways
that are consistent with their culture. Culture unites a group of people in
a unique way and support the group’s unity. As consumers, people expect
that businessman will deliver according to the values, customs and rituals
of the existing culture. As the business is going global day by day and the
world is at the verge of ‘global village’ the need for developing
understanding of cultural differences has become essential to survive.
Therefore, the marketers who wish to be the part of the ongoing
process need to understand the process of acculturation so that they can
develop ways to handle the consumers of different cultures. People’s
attitudes toward business is also determined by the culture. ‘What is right
13
and what is wrong’ are basic to all businesses and for doing or not doing a
particular work is judged on the basis of prevalent culture and also
determines ethical code of conduct.
Despite the pervasive nature of culture, not all people within a
society think, feel, and act the same way. Every society has subculturesgroup of people who share certain values but exhibit them in different
ways. Within a society such as the India, there are the different tastes and
preferences of the different starta. Like a Punjabi has altogether different
preferences then that of a South Indian in the name of certain products
like food and clothing, and the shrewd marketers have always capitalised
on this kind of opportunities. Hence, a thorough understanding of socialcultural environment is imperative in order to be successful.
2.4 ENVIRONMENTAL SCANNING
The marketing environment is dynamic- it is always changing. After
going
through
the
various
factors,
marketers
must
engage
in
environmental scanning so as to capitalise on opportunities and minimise
adverse conditions. Environmental scanning is the process of collecting
information through observation, review of business, trade, government
publications and marketing research efforts. Then such collected
information is reconciled and assessed so as to interpret the findings. By
evaluating available information, a marketing manager should be able to
determine
possible
threats
and
opportunities
associated
with
environmental fluctuations. By these marketing efforts, marketing
strategies could be developed for the coming time.
2.5 RESPONDING TO ENVIRONMENTAL FORCES
Generally,
environmental
two
forces.
approaches
In
first
are
followed
approach,
in
responding
marketers
believe
to
that
environment forces are largely controllable forces and they can do little.
14
But a well-managed organisation can go for reactive approach in the sense
that it adapt itself quickly to counter the negative effects. For example, an
organisation possess little power to change economic conditions, new
regulations, or the actions of the competitors, it can monitor the changing
environment closely and can adjust its strategies to cope up with the
effects.
A second approach regarding the marketing environment is to take
proactive, or aggressive stance towards environmental forces. They believe
in lobbying, public relations and manipulations etc. so as to alter some
environmental forces. For example, a firm can lobby political officials to
repeal legislation that it believes will restrict its business. But neither of
the approaches is superior in this connection. The selection of a particular
approach is much more dependent upon organisation’s mission,
managerial capabilities, financial resources, marketing skills, human skills
and the nature of the environmental forces within which an organisation
has to work.
2.6 SUMMARY
Marketing environment refers to all factors that have a direct or
indirect bearing on the functioning of the business. Every business firm
encounters a set of internal and external factors. The internal environment
consists of the factors which influence the various strategies and decisions
which happen within an organisation’s boundaries. These factors include
human resources, company image, management structure, physical
assets, technological capabilities, marketing resources, and financial
factors. The external environment comprises of micro and macro
environmental factors. Micro environment is immediate environment of the
firm which include suppliers, consumers, competitors, intermediaries and
publics. These factors are generally regarded as controllable factors
because the marketing department commands a fair amount of control
15
over these factors and can modify or alter as per the requirements of the
organisation.
The businessmen must monitor the major macro environmental
factors
which
include
demographic,
economic,
political/legal,
technological and social/cultural factors. In the demographic environment,
marketers must be aware of growth of population, composition of age,
educational levels and geographic shifts in population. In the economic
arena, they need to focus on per capita income, distribution of income,
saving pattern and credit availability etc. In the technological factors,
accelerating pace of technological changes, opportunities for innovation
and increased regulations of the government towards adopting technology
are the main concerns to be monitored. In the political/legal factors,
businessmen must work within the laws and regulations so as to protect
their as well as society’s interest. Finally, in the social/cultural
environment, marketers must understand the prevalent culture and its
nature and must address the needs of different subcultures within a
society. A continuous and vibrant monitoring of the environment is
indispensable for business growth.
2.7 KEYWORDS
Demography: The study of population features i.e. relating to broad
population statistics, such as age, sex, household composition etc.
Competitive advantage: A firm which offers better marketing mix
to its target consumers than that of competitors.
Culture: The whole set of beliefs, attitudes and ways of behaving by
a group of people.
Macro-environment: The general external business environment in
which a firm operates and are uncontrollable.
16
Micro-environment: The general business environment factors
which are controllable in nature.
Marketing audit: A systematic review of a company’s marketing
activities and of its marketing environment.
Technology: The application of science for its practical purposes.
Legal environment: Laws and regulations and their interpretation.
2.8 SELF ASSESSMENT QUESTIONS
1.
What is marketing environment? Write down its main
ingredients.
2.
Define marketing environment? Discuss in brief the factors
that constitute marketing environment.
3.
“Firms which systematically analyse and diagnose the
environment are more effective than those which don’t”.
Elucidate.
4.
Discuss the demographic and technological trends that can
affect the future of the business.
2.9 REFERENCES/SUGGESTED READINGS
1.
K.
Ashwathappa,
Business
Environment
for
Strategic
Management, Himalaya Publishing House, Mumbai.
2.
Francis
Cherrunilam,
Business
Environment,
Himalaya
Publishing House, New Delhi.
3.
S.K. Misra and V.K. Puri, Indian Economy, Himalaya
Publishing House, New Delhi.
17
4.
B.B. Tandon and K.K. Tandon, Indian Economy, Tata McGraw
Hill, New Delhi.
5.
Kotler, Philip, “Marketing Management - Analysis, Planning,
Implementation, and Control”, PHI, New Delhi.
6.
Namakumari
S,
“Marketing
and
Ramaswamy,
V.S.,
Management”, MacMillan Publishers, New Delhi.
7.
Skinner,
J.,
S.
Steven,
Company, Boston.
18
“Marketing”,
Houghton
Miami
LESSON-3 UNDERSTANDING CONSUMER AND
INDUSTRIAL MARKETS
STRUCTURE
3.0
Objective
3.1
Introduction
3.2
Meaning and definition of consumer behaviour
3.3
Consumers’ Buying Dynamics
3.3.1 Psychological Factors
3.3.2 Personal Factors
3.3.3 Cultural Factors
3.4
Organisational Buying Behaviour
3.5
Difference between business market and the consumer
market
3.6
Types of buying situations/transaction
3.7
Participants in Business Decisions
3.8
The organizational buying decision process
3.9
Summary
3.10 Keywords
3.11 Self Assessment Questions
3.12 References/suggested readings
3.0 OBJECTIVE
This chapter will enable the students to understand the various
factors that affect consumer and industrial behaviour. The chapter makes
a distinction between personal and organisational buyers. It is important
for the marketers that how consumers choose between the alternatives.
1
3.1 INTRODUCTION
It is quite evident that knowing consumer needs and desires is a road
to success for the marketers, but the question is how? It is not a simple
task. At the first instance, we can feel that whatever consumer is telling
may be perceived as correct but actually he may act otherwise. They may
respond to your message but may be influenced at the last moment by
their friends, family members or by their other reference groups. It may
happen that they intend to seek products as their counterparts are using
but their cultural moorings may not allow them to use those products.
They may not be in touch with their deeper motivational level and may not
exactly know as to what they really need. Even after conducting surveys
and knowing their needs, while trying to convey a message, a marketer
may entirely fail to make audience perceive the message as desired. A
marketer, for the convenience of the consumers may try to make the goods
available at their doorstep, while they actually may prefer going to
marketplace. The marketers’ study finds varied types of personalities
which require different sort of appeals to convince them according to their
self-concepts. So, there are hundreds of questions, which come in the way
of conducting research on consumers for knowing their deep-rooted needs
and desires, but nevertheless marketers must study their target
customers’ needs, wants, perceptions, preferences and buying behaviour.
So, the aspect of studying consumer behaviour is another paradigm
in the field of marketing which requires huge attention. Although it needs
a full life-span to study and understand a person’s consumption decisions
but for practical reasons marketers have to study consumer behaviour.
The study of consumer psyche facilitates designing of more effective
solutions to marketing problems. Therefore, a marketer’s task is varied and
complicated than it actually seems to be. It’s not only the need and wants
the marketers have to look for. Rather, their real task is looking for various
satisfiers for these needs. These satisfiers are not mere tangible products
2
and services but a complicated expression in terms of products and
services of consumers’ hidden desires and dreams, of consumers’personality make-up and its complicated relation with cultural and social
values disseminating from socialisation process and from onslaught of
globalisation of culture.
3.2 MEANING AND DEFINITION OF CONSUMER BEHAVIOUR
The most crucial issue for the marketers is to identify the needs of
the consumers. Only the identification of needs is of no value unless and
until this is transformed in to a meaningful and appropriate satisfiers. For
this whole process of converting needs into actual satisfaction one needs
to understand the complete make up of consumer’s mind, and this process
is known as consumer behaviour. Let’s also discuss some of the definitions
of consumer behaviour.
According
to
Schiffman
and
Kanuk
“Consumer
behaviour
encompasses all of the behaviours that consumers display in searching for,
purchasing, using, evaluating and disposing of products and services that
they expect will satisfy their needs”.
Wells and Prensky defines that Consumer behaviour is the study of
consumers as they exchange something of value for a product or service
that satisfies their needs.
Hawkins, Best and Coney describes “The field of consumer behaviour
is the study of individuals, groups, or organisations and the processes they
use to select, secure, use, and dispose of products, services, experiences,
or ideas to satisfy needs and the impacts that these processes have on the
consumer and society”.
On the basis of above definitions, it can be concluded that consumer
behaviour is the study of consumers regarding what they buy, when do
3
they buy, from where they buy, how frequently they buy, and how they use
certain products. But the study does not stop here as it also goes further
to study the post purchase and evaluations of the consumers. So, it
addresses all the issues related from pre-purchase to post purchase
behaviour of the consumers.
The study regarding consumer behaviour can be divided into two
parts i.e. consumer buying dynamics and dynamics of business buyers.
3.3 CONSUMERS’ BUYING DYNAMICS
Let’s discuss in brief the various determinants of consumer
behaviour. Figure 1 summarizes the various factors that influence
consumers’ buying behaviour.
Fig. I
Cultural
Social
Personal
Psychological
Culture
Reference Group life cycle
Age & Stage Motivation in
Subculture
Family
Occupation
Social Class
Roles & Status
Economic Personality
circumstances
Perception
Source: Marketing Management by Kotler, p. 173.
3.3.1 Psychological Factors
A person’s acquired needs are influenced by certain psychological
factors such as motivation, perception, learning and personality, etc.
(a)
Motivation: Motivation is a process of restoring the balance
between actual and designed state of mind that has been effected by some
physiological or psychological deprivation. This deprivation may be the
cause of simple reaction in human biological system causing hunger,
4
thirst, security and desire for sex etc. or it may be due to complicated
acquired needs. So, its very important for the marketers to have a close
eye on this dynamic process of motivation.
(b)
Perception: Perception is the process by which an individual
selects stimuli, organises information about those stimuli, and interprets
the information. Perception poses powerful implications for marketers.
What is perceived by an individual, it determines how he or she behaves?
No consumer purchase can take place unless a consumer perceives that
the product or service will offer the benefits he or she needs. Accordingly,
marketers
must
understand
how
perception
works
in
order
to
communicate successfully a product’s benefits. Regardless of the fact that
a product is innovative or advertisement is effective, it will fail if it is not
perceived favourably by the potential consumers.
(c)
Learning: Learning is a continuous process by which
individual acquires knowledge so that it causes a permanent change in
behaviour. Learning is a kind of process that evolves over a time and can
not be directly observed. When a person perceives new stimuli in the
environment, it is related with the existing pond of knowledge. Therefore,
learning reflects both current experiences and past back ground. Learning
is essential to the consumption process. In fact, consumer behaviour is
largely learned behaviour. We acquire most of our attitudes, values, tastes,
preferences, symbolic meanings and feeling through learning. Human
culture and social class, institutions such as schools and religious
organisations, family, friends, mass media and advertising provide
learning experiences that influence the kind of life style the consumers
seek and the products they consume. Marketers spend considerable effort
to ensure that consumers learn of their existence as well as about their
products. Companies that make their consumers learn about their
products and services in an effective and efficient manner often obtain a
long-term competitive advantage them that of their competitors.
5
(d)
Personality:
Personality
is
defined
as
those
inner
psychological characteristics that both determine and reflect how a person
responds to his environmental stimuli. Personality is enduring and
ensures that a person’s responses are consistent over time. But personality
can not be considered as a unified whole, for that purpose different
personality traits are to be studied by the marketers. For example,
dogmatism is a personality trait that measures the degree of rigidity among
individuals. If a person is highly dogmatic, it’s very difficult to convenience
him regarding the innovative products and brands. They are move likely to
choose well established brands and can not be convinced by celebrities in
the advertisements. Rather these kinds of people are influenced by the
authoritative appeals. On the contrary, those who possess the trait of
innovativeness are move receptive to new products, new services and new
practices. They are prone to newer experiments. There could be some other
personality traits like inner directed consumes and other directed
consumers. So, on the basis of these personality traits, the process of
segmentation can effectively be performed.
3.3.2 Personal Factors
A
consumer’s
decisions
are
also
affected
by
his
personal
characteristics including age, occupation and life-style.
(a)
Age and stage in the life cycle: The first factor influencing a
consumer’s decision is his age. The need for different products and services
changes with the passing of age. Milk powder, toys, baby foods are special
preference of the babies and children. Adults require different kind of
clothing, educational facilities, recreational facilities and much more items
related to fashion. Girls and women require different products than that of
their male counterparts.
6
Consumption pattern is also affected by the specific stage of the
family life cycle. With the different stages in the family cycle, different
products are attached with each. For example, young and unmarried
people living away from home have few financial burdens, are engaged in
buying kitchen equipments and light furniture. They also enjoy leisure
time and spend money on items like colour TV or stereo systems. On the
contrary, old married couples with dependant children, spend on
education, cars, homes and necessary appliances. So, life-cycle stage does
effect a buyer’s decision.
(b)
Education and Occupation: Occupation and education
influence buying behaviour. Education has always been associated with
the purchase of books, healthier foods, and entertainment. Level of
education also influences how decisions are made. They seek more
information and better quality products than the other ones. The
occupation also shapes the consumption needs. People belonging to
different occupation need different products. But, apart from their specific
needs, the status and role of a person within an organisation affects his
consumption behaviour. For example, occupation can affect the type of
clothing a person buys, transportation choice, food purchases, and the
need for time-saving products.
(c)
Life-Style: Life-style is a more comprehensive and more
contemporary concept and perceived as more useful than the concept of
personality. For that reason, considerable attention is being devoted to
understand the word life style, how it is measured and how it is used by
the marketers. Broadly it is defined as patterns in which people live and
spend their money and time. These are based on consumers’ motivations,
learning, social class, demographics and other varieties. Therefore, it is a
kind of summary construct which reflects the values of consumers.
7
In nutshell, life-style addresses the way consumers express their
personalities in their social and cultural environment. The consumer
researchers put their focus on attitudes, interests and opinions to measure
the life-styles of different consumers. This measurement technique is
known as psychographic. Based on this technique, different life-styles can
be identified and measured and then these bases are used for
segmentation, product positioning and for developing the promotional
campaigns.
(d)
Economic circumstances: The choice regarding product is
greatly affected by person’s economic circumstances. It consists of
consumer’s
spendable
income,
savings,
assets,
borrowing
power,
perception, and attitude towards spending and savings etc. Marketers have
to pay a continuous and constant attention towards personal income,
saving and interest rates in the market because their marketing efforts
largely depend on these issues. For example, if interest rates are low, then
there would be more money supply in the market and accordingly,
marketers can take steps to reposition or reprice their products and viceversa. So, these were some of the personal factors that affect consumer
behaviour.
Consumers turn to reference groups for many reasons. The
consumer purchase process can be difficult and confusing one, and for
that matter, the consumer might need information from others to make his
or her way through the steps in his purchase process.
For example, a couple who wish to go for vacation rely on information
from friends who had just enjoyed a vacation at a particular place. Their
friends’ travel experiences and knowledge enabled this couple to gather
information, evaluate alternatives, and reach a purchase decision more
quickly than they would have been able to do alone.
8
In other cases, consumers might rely on reference groups because
they use their purchases to make a statement about the image they want
to project and to identify themselves as a part of the group by buying the
some products as their friends, they indicate that they are like them. For
example, a student wears a cap with the name of his college or school to
demonstrate his identification with his institution. Consumer’s decisions
are reinforced by doing so and subconsciously he also avoids dissonance.
Each potential reference group offers certain advantages to a
consumer. In choosing among the groups, the individual must weigh the
information, resources, and image to be obtained by buying the same
products in the same way the group members do. In doing so, the
consumer must have some knowledge of how the members of the group
out and the values they held. The three categories of groups which are
important for the marketers to understand are:
(i)
Primary and secondary groups: A primary group is one with
which an individual meets and interacts on regular basis. Family, close
friends and co-workers are in the primary groups whereas secondary
groups consist of those people to whom an individual interacts only
occasionally and does not consider their opinion very strongly.
(ii)
Formal and Informal groups: A formal group is one which has
a highly defined structure, specific roles and authority position and
specific goals. Rotary club, Lions Club, Labour Unions are name of the
examples of formal groups. In contrary, an informed group is loosely
defined and possess no specific roles and goals. Having a meeting with the
neighbours over a cup of tea to discuss some happenings, is an instance
of an informal group.
(iii)
Membership and symbolic groups: When a person belongs to a
group or qualifies for membership, such kind of group is known as
membership group. For example, a doctor qualifies to be a member of
9
medical association or all workers in a factory qualify for membership to
the labour union. A symbolic group is one for which an individual aspires
to belong to, but is not likely to be the member but he behaves like the
members of that group. For example, a clerk may act as if he belongs to
executive class by adopting their life styles, attitudes, values and wearing
style etc.
Any of these groups can serve as a point of reference for the
consumers in determining their purchase behaviour. Therefore, a marketer
has to keep a constant track of group behaviour so as to be a successful
marketer.
(e)
Family:
Family
also
influence
the
buying
behaviour.
Although, now a days, women’s roles are changing fast but still they make
buying decisions related to household items like healthcare products,
foods, landing supplies and kitchen wares etc. Joint decisions of husbands
& wives are also taken as regards a variety of products, particularly
durables such as furniture, appliances and other expensive items. Today,
children also play a bigger role in family purchase decisions. The colour of
a car, size of the TV and brands of certain home appliances are influenced
up to a greater extent by the children. The husbands decide specifically
about the saving instruments, life insurance and house building materials
etc.
To develop a marketing-mix that precisely satisfies the needs and
wants of the target consumers, marketing managers need to understand
the structure of the family and the roles of women and children in a family.
(f)
Roles and Status: A role is a set of functions and activities
that a person in a particular position is expected to perform. Since people
possess different positions within groups, institutions, organisations,
societies and families, they have different roles to play. For example, your
roles may include student, son or daughter, friend, employee and spouse
10
or parent etc. A person’s various roles influence buying behaviour. Being
parents, you buy books for your children, toys clothing etc. In role of
husband you buy jewellery for your wife. As a manager, you would like to
buy clothes which reflect your status in the organisation, such as safari
suit, three-piece suit, tie, leather shoes etc.
Each role that a person plays has a degree of status which is in
relative term perceived by the society. It is the degree of influence that an
individual exerts on the behaviour of others. People use different products
and services to reflect their status. The CEO of an MNC may drive a BMW
to communicate his status in the society. A marketer’s job is to adjust
himself according to the changing roles and status of the individuals.
3.3.3 Cultural Factors
Cultural factors exert the greatest impact on buying behaviour of a
consumer. A buyer is always influenced by his culture, subculture and
social class. So, let’s have a brief discussion on these topics.
(a)
Culture: From the dawn of civilisation, human-being have
been looking for ways and means to better their lives. In the process they
have come together and have formed common action and reaction
patterns, common ways of doing things, forming common values and
beliefs to help one decide what to do or what not to do and this is a dynamic
process in which something is added up and subtracted over the time as
per the requirement of the situation. This process of building an common
platform for better living is called ‘culture’ and have great impact on any of
the consumer decisions. So, marketers have to take a concentrated note of
this phenomenon.
(b)
Subculture: Members of a culture share most of the core
values, beliefs, and behaviours of that culture. However, most individuals
also belong to several subcultures. A subculture is a segment of a large
11
culture whose members share distinguishing patterns of behaviour. An
array of ethnic, nationality, religious, regionality, and even age characterize
subcultures. For example, India as a whole considered as a culture but
when it comes to different religions, different regions, castes and
languages, it forms so many sub-cultural groups which are diverse in
nature. A Punjabi is having different tastes and preferences for food and
dresses against his counterpart who is a Gujarati or a Tamil. Hence, the
existence of these subcultures provides marketers with the opportunity to
develop unique marketing programmes to match the unique needs of each
segment.
So, understanding individual consumer should be fascinating for
you. In the field of marketing, one must be curious about why people
behave as they do. Such curiosity is essential for success in this field. That
is what marketing is all about understanding and anticipating consumer
needs and developing solutions for those needs. This particular section was
devoted to individual consumer. Now in the next section we will be having
discussions on the industrial consumer/buyer.
3.4 ORGANISATIONAL BUYING BEHAVIOUR
Industrial organisations do not engage only in selling. They also buy
certain kind of things like materials, manufactured parts, plant &
equipments and different services etc. Therefore, they require the services
of other organisations and such organisations need to understand these
organisations’ needs, resources, polices, and buying procedures. So, in this
section we will examine few questions like-what is business market and
how it differs from consumer market, what kind of buying situations occur
and who involves in the buying business forecast etc. Let’s look into these
questions one by one.
According to Webster and Wihel “Organisational buying is the
decision-making process by which formal organisations establish the need
12
for purchased products and services and identify, evaluate, and choose
among alternative brands and suppliers”.
S.J. Skinner defines “Organisational buying behaviour refers to the
actions and decision process of producers, resellers, and governments in
deciding what products to buy”.
So, on the basis of above definitions it can be concluded that
organisational buying is the decision-making process in which one
organisation receives the resources from the other organisation and the
providers identify the need for products and services and the receivers
identify, evaluate, and choose among alternative brands and suppliers.
3.5 DIFFERENCE BETWEEN BUSINESS MARKET AND THE
CONSUMER MARKET
The business market consists of all the organisations that acquire
goods and services which are used for further production so that these are
sold or supplied to others and also involve many activities like banking,
finance, insurance, distribution and services etc. In comparison to
consumer market huge investment is also involved. On the contrary, in the
consumer market, products and services are ultimately delivered to final
consumers and lesser amount of money is involved. Let’s discuss some of
the differentiating points between the two markets.
(a)
Fewer buyers: In case of business market, buyers are fewer
in number as compared to consumer market. For example, a book
publisher looks towards universities for the recommendations of its books,
but after recommendations sell the same to the students who are
thousands in numbers.
(b)
Close supplier-customer relationship: There is a smaller
customer base but having important power, we can observe that there is a
close relationship between the two parties because customer is heavily
13
dependant upon supplier. It is expected of a supplier that he would offer
customized service and will pay regular visits to the customer. If it is the
case of a technical product, he would make special efforts to impart the
technical know-how to the customer.
(c)
Geographically concentrated buyers: Most of the business
concerns that produce the same nature of products are generally found
concentrated in a particular geographic area. This kind of concentration
helps producers to reduce certain amount of selling costs. Availability of
raw material and transportation help them reducing costs. For example
more than half of the textile industries in India are concentrated in two
states only i.e. Gujarat and Maharashtra. Most agricultural inputs are
produced in the states like Punjab and Haryana.
(d)
Derived Demand: The demand for organisational product is
called derived demand because organisations purchase products to be
used directly or indirectly in the production of goods and services to satisfy
consumers’ demand. Consequently, the demand for organizational
products is derived from the demand for consumer products. For example,
as long as consumers continue to purchase pencils, there will be an
organisational demand for graphite and wood to manufacture pencils. If
there were no consumer demand for pencils, there would be no demand
for wood and graphite to make pencils. As a result, organisations like wood
manufacturers often target marketing efforts at the ultimate consumers,
even though the firms don’t sell to them directly.
(e)
Inelastic Demand: The demand for many organisational
products is inelastic. It means that fluctuations in price of a product will
not significantly affect demand for the product. Elastic demand, by
contrast, means that a change in price will cause an opposite change in
demand. However a sizeable price increase for a particular component that
represent a large proportion of a product’s cost may cause demand to
14
become more elastic if the price increase of the component part causes the
price of the consumer product to rise sharply. For example, if the price of
wood rises sharply, paper manufacturers are likely to pass this increase
on to consumers, who may in turn cut back on their paper consumption
because of such increase.
(f)
Professional
Purchasing:
The
business
products
are
generally purchased by highly trained and professional people. They invite
biddings, proposals and quotations for their purchase contracts which are
not found in case of consumer buying.
(g)
Direct purchasing: When it comes to consumer buying, many
intermediaries are involved but in case of business buying, buyers
generally buy directly from the manufacturers. It is truer if it is a case of
technical product which is complex as well as expensive. So, there are
some of the examples of differentiation between a business purchase and
a consumer purchase.
3.6 TYPES OF BUYING SITUATIONS/TRANSACTION
A business buyer has to take number of decisions in making a
purchase. These decisions depend upon the type of buying situations.
These situations fall into one of three purchase categories - new task,
modified rebuy and straight rebuy.
(a)
A new task purchase: It is a kind of buying situation in which
a purchaser buys a product or service for the first time to perform a new
job or to solve a new problem. In a new task purchase, the organisational
buyer needs much information. In this case, the buyer has to face so many
challenges regarding product specifications, vendor specifications and
procedures for the future purchase, therefore, the longer the time to
decision completion.
15
(b)
A modified rebuy purchase: It is a type of buying situation in
which the buyer wants to modify product specifications, prices, delivery
requirements, and other terms and conditions. For example, you might
seek faster delivery, lower prices or higher quality of products to meet the
changing needs of your customers. A modified rebuy situation may cause
regular suppliers to become more aggressive and competitive to keep an
eye on customers’ business. Simultaneously competing supplier may see
an opportunity to obtain the company’s business.
(c)
A straight rebuy purchase: It is a routine purchase of the
same products under approximately the same terms of sale. The buyer
chooses from suppliers on the basis of its already approved list giving
weight to their past performances. He requires little information for
straight rebuy purchase decisions. In such cases suppliers monitor the
organizational buyer’s inventory and let the buyer know what needs to be
ordered and when. These purchase decisions are extremely important to
business buyers. It is critical that organizations purchase quality materials
and components to be used in the manufacturing process.
Simultaneously, they must strive to keep their costs down.
3.7 PARTICIPANTS IN BUSINESS DECISIONS
Business purchase decisions are hardly made by just one person.
Instead, most organisations make their purchase decisions through many
individuals who work in the organisation and also participate in the
purchase decision process. These people consist of users, influencers,
buyers, deciders, and gate helpers.
(a)
Users: These are those individuals who actually use the
product in the organisation. They frequently initiate the purchase process,
establish the criteria or specifications for the purchase, and evaluate the
performance of the product in comparison to established criteria.
16
(b)
Influencers: These are highly technical people such as
engineers, who help develop the specifications and evaluate alternative
products of the competitors.
(c)
Buyers: These people are also called as purchasing agents
who help in selecting suppliers and negotiating the terms and conditions
of purchase.
(d)
Deciders: These are the individuals who actually choose the
products and suppliers. For routine items, deciders and buyers may be the
same but if the price of a product exceeds a certain limit then higher
management personnel generally make the purchase decisions.
(e)
Gate keepers: These people consist of secretaries and
technical personnel who control the flow of information to and among the
persons in the buying centre.
3.8 THE ORGANIZATIONAL BUYING DECISION PROCESS
Because organisational decisions typically involve more individuals
in more complex decision tasks than household or individual decisions,
marketing efforts to affect this process are much more complex. There are
different stages in the decision-making process from problem recognition
to post purchase performance evaluation. Let’s discuss these stages one
by one.
1.
Problem Recognition: Like any other decision-making
process, the first stage of the organisational buying decision process
involves problem recognition, where one or more persons recognise a
problem. It may occur under a variety of circumstances. For example, the
sales manager and office manager of an office play a key role in recognising
the need to add computers to their office. Recognition of this problem,
however, can come up in several ways. In this particular instance, a
17
continuing problem between field sales agents and internal administrative
staff may lead the office manager and sales manager to recognise the
problem. The continuation of these sources of influence eventually leads
to an increased level of importance and the subsequent stage of
information search.
2.
Information Search: Information search can be both formal
and informal. Site visits to evaluate a potential vendor, laboratory tests of
a new product or prototype, and investigation of possible product
specifications are part of formal information search. Informal information
search can occur during discussions with sales representatives, while
attending trade shows, or reading industry specific journals. Business
buyers search for information both to help make the best decision and to
support their actions and recommendations within the organisation.
3.
Evaluation and Selection: The evaluation of possible
suppliers and selection of a supplier often follows a two-stage decision
process. The first stage is making the buyer’s approved suppliers list. In
this case, a conjunctive decision process is very common. Using this kind
of process, the organisations screen out potential suppliers that do not
meet all its criteria.
A second stage of organisational decision making could involve other
decision rules such as disjunctive and lexicographic etc. In the disjunctive
decision rule, a minimum level of performance for each important attribute
is established. All brands that surpass the performance for any key
attribute are considered acceptable. The lexicographic decision rule
requires the business buyer to rank the criteria in order of importance. The
buyer then selects the supplier/product that performs best on the most
important attribute. If two or more brands tie on this attribute, they are
evaluated on the second most important attribute. This process is further
18
complicated by the fact that different members of the decision-making unit
have different evaluation criteria.
4.
Purchase and Decision Implementation: Once the decision
to buy from a particular organisation has been made, the method of
purchase must be determined. From the seller’s point of view, it means
how and when they will get paid. In many cases, payment is not made until
delivery. Others involve progress payments. For a construction or builders’
firm that takes years, the method of payment is critical. On international
basis, purchase implementation and method of payment are even more
critical.
5.
Post purchase performance evaluation: In the final stage of
business buying division process, the new product’s performance is
evaluated. The product’s actual performance is compared to specifications
and necessary adjustments are made of the product that does not function
as per expectations, the organisation can ask the supplier to replace it. At
the same time, the supplier’s performance is also evaluated. If it is found
to be unacceptable, the buyer will seek corrective action from the supplier
or he will search out for a new supplier.
3.9 SUMMARY
This chapter is basically divided into two sections. Section I deals
with the consumer behaviour and section II deals with organisational
buyer behaviour. Consumer behaviour is the action and decision processes
of people who purchase goods and services for personal consumption.
Consumer decision making is influenced by social, psychological, and
personal factors. Social factors are forces exerted by other people that
affect consumer behaviour. A social class is a relatively homogeneous and
stable group of people with similar values, attitudes, and behaviours. A
role is a set of functions and activities that a person in a particular position
is expected to perform. Culture is learned values, behaviours, and
19
meaningful symbols shared by members of a society. A culture is further
divided into several subcultures.
Psychological factors are internal forces with in people that affect
buying decisions. These factors are motives, perception, learning and
personality etc. Motivation research involves analysing the major motives
that influence buying behaviour. Perception is the process by which an
individual selects, organises and interprets information inputs to create
meaning. An attitude is a person’s overall feeling towards some object.
Personality is the total of all traits and behaviours that make up a
person. Demographic factors are personal characteristics such as age, sex,
race, and background.
Like households, organisations make many buying decisions. In
some instances, these buying decisions are routine replacement decisions,
at other times, they involve new and complex purchase decisions. The
organisational decision process involves problem recognition, information
search, evaluation and selection, purchase implementation and post
purchase evaluation. Purchase implementation is more complex. How
payment is made is of major importance. Finally, use and post purchase
evaluation are often quite formal.
3.10 KEYWORDS
Problem recognition: The awareness that there is a discrepancy
between an actual and a desired condition.
Information search: A search for information carried out by a
consumer to reduce uncertainty and provide a basis for evaluating
alternatives.
Motive: An aroused need that directs the behaviour toward a goal.
20
Physiological need: A need which is based on biological functioning
like food, water, air, and sex etc.
Psychological and social need: A need which emerges from a
person’s interactions with the social environment.
Perception: The process of selecting, organising, and interpreting
and giving meaning to stimuli.
Learning: It is relatively a permanent change in behaviour that
results from experience.
3.11 SELF ASSESSMENT QUESTIONS
1.
What do you understand by consumer behaviour? Write a
brief note on consumer’s buying dynamics.
2.
In what ways do roles and family affect purchase decisions?
3.
Elaborate in detail the different psychological factors that
influence consumer decision-making process.
4.
What are the different purchase situations commonly
encountered by organisations? How do organisations typically
respond to each situation?
5.
How do organisational markets differ from consumer markets?
6.
Write short notes on the following:
(a)
A straight rebuy purchase
(b)
Derived demand
(c)
Professional purchasing
21
3.12 REFERENCES/SUGGESTED READINGS
1.
Kotler, Philip, “Marketing Management Analysis, Planning,
Implementation and Control”, PHI, New Delhi, 1997.
2.
Schiffman G., Leon and Kanuk, Leslie Laza”, Consumer
Behaviour”, PHI, New Delhi, 2002.
3.
Nama Kumari S. and Ramaswamy, V.S., “Marketing
Management”, MacMillan Publishers, New Delhi, 1995.
4.
Engel, James, & Blackwell, Roger “Consumer Behaviour”, The
Orydon Press, Orlando, 1990.
22
LESSON-4 MARKETING RESEARCH AND
MARKETING INFORMATION SYSTEM
STRUCTURE
4.0
Objectives
4.1
An introduction to marketing research
4.1.1 Defining Marketing Research
4.1.2 What Kinds of Research are undertaken?
4.2
Why the companies use marketing research
4.3
Applications of marketing research
4.4
Limitations of marketing research
4.5
Marketing information system
4.6
Marketing research process
4.7
Summary
4.8
Keywords
4.9
Self test questions
4.10 References/Suggested readings
4.0 OBJECTIVES
The objectives of this lesson are:
•
To define marketing research.
•
To learn why marketing managers use marketing research.
•
To identify the different kinds of research that companies
undertake and the different situations in which research can
be helpful.
•
To describe the term ‘marketing information system’.
•
To discuss the major steps in the marketing research process.
1
4.1 AN INTRODUCTION TO MARKETING RESEARCH
Before defining ‘marketing research’, let us define research. Research
always starts with a question or a problem. Its purpose is to find answers
to questions through the application of the scientific method. It is a
systematic and intensive study directed towards a more complete
knowledge of the subject studied.
Research can be classified into two broad categories: (i) basic
research, and (ii) applied research. Basic research is sometimes called
‘fundamental’ research, ‘theoretical research or ‘pure’ research. It aims at
expanding the frontiers of knowledge and does not directly involve
pragmatic problems. The essence of basic research is that it addresses
itself to more fundamental questions and not to the problems with
immediate commercial potential.
Applied research, on the other hand, proceeds with a certain
problem, and it specifies alternative solutions and the possible outcomes
of each alternative. Unlike basic research, it is prompted by commercial
considerations. Though one may usually be able to distinguish between
basic research and applied research, the distinction between the two
sometimes gets blurred. Several firms may be engaged in basic research
which does not have any immediate commercial use. However, it may be
potentially commercial or else the firms would not have undertaken it at
all.
Applied
research
can
be
divided
into
two
categories:
(i)
problemsolving research, and (ii) problem-oriented research. Problemsolving research, as the name implies, is concerned with a particular issue
or a problem and is usually proprietary in character. The latter
characteristic indicates that such a research is undertaken within a firm
or by an outside consultant on its behalf. Problem-oriented research, on
the other hand, is concerned with a class of issues of problems in which
2
several firms may be interested. Research of this type is usually concerned
with conceptual aspects but is oriented towards applied problems.
4.1.1 Defining Marketing Research
Marketing research is a systematic and objective study of problems
pertaining to the marketing of goods and services. It may be emphasised
that it is not restricted to any particular area of marketing, but is applicable
to all its phases and aspects. As marketing research tackles problems
which seem to have immediate commercial potential, it should be regarded
as applied research. We may also say that marketing research is of both
types– problem-solving and problem-oriented.
The American Marketing Association (AMA) has defined marketing
research as follows:
Marketing Research is the function which links the consumer,
customer, and public to the marketer through information– information used
to identify and define marketing opportunities and problems; generate,
refine, and evaluate marketing actions; monitor marketing performance; and
improve understanding of marketing as a process.
Marketing research specifies the information required to address these
issues; designs the” method for collecting information; manages and
implements the data collection process; analyses the results; and
communicates the findings and their implications.
The American Marketing Association while defining marketing
research emphasises that its function is to provide information to
management so that it can identify and react to marketing opportunities
and problems. The AMA’s definition of marketing research also indicates
the scope and process of marketing research. In short, marketing research
provides the requisite information for making marketing decisions.
3
4.1.2 What Kinds of Research are undertaken?
The research studies show the following usage of marketing
research:
1.
The measure-market potentials, characteristics of their
markets, and their shares of markets.
2.
To obtain information that could help them make shortrange
and long-range forecasts.
3.
To evaluate new-product opportunities and acceptance, and
to test existing products relative to competitors’ products.
4.
To help companies make better advertising decision.
4.2 WHY THE COMPANIES USE MARKETING RESEARCH
We have seen that there are many different ways that companies use
marketing research. But why is it even necessary for companies to use
something called “marketing research”?· The answer to this inquiry will
help beginning marketing research students have a better understanding
of why marketing research has evolved and is continuing to grow.
Several characteristics of modern business encourage the use of
marketing research by businesses. First, the suppliers of products and
services need to have information about final consumers in order to market
their products and services more effectively. Second, as a company grows
and starts distributing its products in a number of different markets, the
managers of the company find themselves becoming more separated from
the final consumers of their products.
I.
Managers Are Separated from Their Final Consumers
Many manufacturers distribute their products through their own
sales personnel to wholesalers, who in turn sell those products to retailers,
who then make the sale to the final consumers. In their normal course of
business many manufacturers have little direct contact with the retailers
4
of their products and no contact at all with the final consumers of their
products. Thus, the marketing managers in such firms are separated from
their final consumers by geographical distance as well as by a number of
layers of people within their own organizations and within their
wholesalers’ and retailers’ organizations.
Although retailers and service organizations have direct contact with
their customers, managers of retail operations often have little knowledge
of their customer’s attitudes, opinions and preferences because sales
clerks and other store personnel do not relay customers’ comments to their
managers. A retailer also has no contact with potential customers, that is,
with individuals who do not currently patronize the retailer’s store but who
might become customers if the retailer could identify them and learn what
would be effective in attracting them.
II.
Marketers Need Information about their Final Consumers
Manufacturers, retailers, suppliers of all kinds of services, and many
other organizations need certain kinds of information in order to be able to
satisfy their customers’ wants and needs and to design effective marketing
programs while still earning a profit. At least five such information topics
are of great interest to marketing managers. These five topics, and some of
the questions marketing managers have regarding them, are as follows:
Target market: What is the best target market for the products or
services being offered by the organization? How large is the target market
and how can it be described? What are the attitudes, opinions, preferences,
lifestyles, and so on of its consumers?
Products/Services: Regarding particular products and services,
how for the market is satisfied or dissatisfied with what is currently
available? What product features and benefit5 do those consumers desire?
How do they compare the organization’s product with those offered ‘by
competitors?
5
Price: How much value does the target market place on the product
in question? What products are they willing to substitute for the product
in question? What prices are charged for those substitutes? What
advantages does the organization’s product have that might allow it to
charge a higher price?
Distribution: What distribution channel is the target market most
likely to use when purchasing the product in question? Is the
organization’s pricing in line with what the target market expects to pay for
the product when purchased through that channel? Does the pricing
include the size of margin the channel traditionally expects to receive? Will
the channel be able to provide the service or support needed for the
product?
Promotion: What can the organization say in its advertisements
about its product that will appeal to the target market and lead them to
consider the organization’s product more attractive, than those offered by
competitors? Through what medium(s) should the organization advertise?
What
specific
vehicles
(i.e.
what
specific
television
programs
or
newspapers) should the organization use to carry the advertisements? How
often should the advertisements appear, and how much money should the
organization spend on advertising? Should personal selling be used? If so,
then how?
Marketing managers in most organizations need answers to some or
all of these questions. Obtaining answers to many of these questions
requires contact with final consumers. Because most manager are
separated from their final consumers- and from the information they needbusiness and other organizations are increasingly turning to marketing
research to obtain the information they need for decision making.
6
4.3 APPLICATIONS OF MARKETING RESEARCH
Following are number of examples on the applications of marketing
research. They clearly bring out how marketing research has been helpful
in resolving marketing problems or in identifying opportunities for the
development of new products.
1.
A pharmaceutical company carried out a study on the
prescription behaviour for a major brand on account of its declining sales.
The study brought out interesting findings on a number of aspects such
as the relationship between the sales and the age of the brand, its regular
promotion, its core therapeutic emphasis and the role of retailers in
servicing prescription. On the basis of findings of the study, the company
changed its marketing strategy. This enabled it to regain the lost market
share of its brand.
2.
Malayala Manorama, which is Kerala’s largest publication
group, has recently launched a monthly women’s magazine in Hindi,
Vanita. While launching this magazine, the management observed that it
was convinced through market research that there was a huge vacuum in
the Hindi magazine segment. This new magazine Vanita has been
positioned as a partner and friend that the modern woman can identify
with. The first print run of Vanita was one lakh copies. Indications are that
within a short time it may become one of the popular Hindi magazines.
3.
Cadbury India Limited launched Picnic from its international
portfolio in February, 1998. It is wrapped in vibrant colours of red, blue
and yellow in conformity with its international packaging. Earlier, Cadbury
Indian Limited commissioned a consumer research study in Mumbai. The
results of this study were encouraging and showed that the Indian youth
is always interested in experimenting with new food options.
4.
Procter
and
Gamble
(P&G)
launched
Menthol,
an
international vibrant of Head & Shoulders. This joins the extraconditioning
7
anti-dandruff shampoo of the same brand. The company conducted a
market research study prior to its launch. The findings of the study
indicated a distinct need for a menthol-based shampoo. The study showed
that in hot and humid conditions as in India, consumers prefer a shampoo
which not only removes dandruff but also provides a cool and tingling
sensation to the scalp.
5.
Another example from P&G shows how marketing research is
used to identify new opportunities in the marketplace. The company was
getting a lot of data on Vicks-Vaporub. The analysis of such data revealed
that the most common symptom of cold was a headache and that majority
of adults typically take a pill to cure it. This disclosed an opportunity for a
product that can treat the headache as well as the other symptoms. The
company thus launched Action 500. It not only treated headache but also
gave relief from blocked nose. Marketing research can therefore lead to the
development of a new product.
6.
Pepsi Foods has assigned great importance to marketing
research. Through research it gets systematic information about its
markets and its customers. All its research is done by the IMRB. Broadly,
research studies done for Pepsi Foods fall in the following three areas:
(i)
Studies undertaken on a continuous basis like marketing
tracking studies and retail audits.
(ii)
Studies are from time to time as per the requirement of the
company such as a study to ascertain the effectiveness of an
ad campaign.
All these types of research studies have tremendously helped Pepsi
Foods to strengthen its position in the market. It feels the pulse of the
market and is always in touch with the latest developments in the market.
7. Another mu1tinational company Whirlpool Asia lays considerable
emphasis on marketing research. In this company, every activity, strategy
8
and decision is based on data collected through the research process. It
believes in planning research in advance though it is rather difficult. It
strives to have a meaningful dialogue with the consumer in order to know
his real opinion about its products, what difficulties he experiences and
what suggestions he has to offer. Information thus received proves to be
quite useful to the company in modifying its products or in evolving new
ones.
Whirlpool has gained an insight into the various segments in the
market. In India, it has segmented the market on the basis of the different
stages of the product life cycle.
Decisions like which size of refrigerator should be put in the market
or what should be the price of a particular model are based on research.
Marketing and Research Group (MARG) has been the main marketing
research agency for Whirlpool.
4.4 LIMITATIONS OF MARKETING RESEARCH
The preceding discussion on the different applications of marketing
research should not lead anyone to assume that marketing research can
solve all the problems of marketing. While it can be extremely rewarding to
a firm, it is wise to know that it is subject to certain limitations. One must
be aware of these limitations in advance so that one is clear about what
marketing research can and cannot do. The following are the main
limitations of marketing research:
First, many a times, marketing research tends to be fragmentary in
its approach as a result of which it becomes difficult to have an overall
perspective in which a marketing problem is to be viewed and studied.
Second, marketing research is criticised on the ground that it
becomes too superficial and faulty in industry. While the principles of
marketing research are good and based on scientific lines, in industry,
9
marketing research is very often used by those who have had no for!llal
training in the subject. Such persons avoid using detailed investigations
and sophisticated techniques which require both time and patience on the
part of marketing researchers.
Third, there is an absence of a meaningful dialogue between the
marketing management and the marketing research team. As a result,
marketing researchers get divorced from the main stream of marketing.
This denies them any opportunity to test their findings in the practical
marketing situation. Marketing researchers tend to think that “research is
the be all and end all”. This attitude further reduces the utility of research
to the management.
Fourth, marketing research is not an exact science. There are several
problems which come in the way of getting accurate results. For example,
consumer behaviour is an area which is rather elusive and the theory does
not go very far in disclosing it very precisely. Analytical tools of marketing
research are still deficient and cannot give us a precise idea, especially on
the behavioural aspects.
Apart from these limitations of marketing research, one finds that it
is sometimes misused. These mis-applications, strictly speaking, are not
the limitations of the subject as such.
Another misuse of marketing research is found in deliberately
delaying decision-making. In the hands of vested interests, it may be used
to avoid taking a certain decision or delaying it until the findings of
marketing research are available.
Finally, it is used to grab power and authority in an organisation.
Executives who are over-ambitious may use marketing research· to
consolidate and strengthen their position in the organisation as also to
extend their authority over their colleagues.
10
4.5 MARKETING INFORMATION SYSTEM
Marketing
Research
is
to
be
distinguished
from
Marketing
Information System (MIS). The latter has been defined as:
A structured, interacting complex of persons, machines, and
procedures designed to generate an orderly flow of pertinent information,
collected from both intra-and extra-firm sources, for use as the basis for
decision-making in specified areas of marketing management.
This definition indicates the interdependent activities associated
with the collection of marketing information, both from internal and
external sources. It also shows that such information is collected to
facilitate decision-making in different areas of marketing management. We
have seen earlier that marketing research is a means of obtaining
information to be used in making marketing decisions. A comparison of the
two concepts shows that while marketing research generates information,
marketing information system concentrates on the storage and flow of
information to marketing managers. This clearly shows that marketing
information system is a much wider concept than marketing research.
A good marketing information system should determine the
information needs of the organisation and generate and” process such
information on a continuing basis. It should also provide for its storage so
that it can be used when required.
Types of Information Supplied by MIS
Marketing information system usually supplies three types of
information to marketing managers. The information could be recurrent,
monitoring and requested. Recurrent information is that information
which is provided on a periodic basis. For example, information on sales,
market shares, customer satisfaction and perceptions, advertising
expenditure, etc. may be supplied on weekly or monthly basis.
11
Monitoring information is the information obtained from regular
scanning of certain sources. For example, official publications, journals,
annual reports of companies constitute common sources of monitoring
information. These sources can be very helpful to companies as they can
indicate the nature of problems that are likely to arise and the possible
changes in business environment. In addition, such information can be
helpful in identifying new market segments, new uses,)f the existing
product as also possibilities of improving the product by introducing new
features.
Requested information, as the name implies, is the information
sought by a marketing manager. Such information could involve a wide
range of activities such as cost and price analysis of competitive products,
cash flow position of competitive companies, quality testing of competitive
products, etc. It may be noted that such information would not be usually
available unless a specific request is made for the same. Once a request is
made for specific information, then a series can be built up over time
provided such information is useful and marketing managers need it
frequently.
MIS to Help Develop Marketing Plans
When a company begins to regularly schedule the coordination of
findings from several research projects designed to assist in specific
recurring decision situations, the company has began to develop a
marketing information system-MIS for short. Such marketing information
systems are beginning to evolve, as the following example illustrate.
To help its managers develop their marketing plans, the Gillette
Company uses information gathered from five different types of regularly
recurring research projects. The five projects were designed to provide the
managers a complete picture of the razor and blade market, including
12
detailed descriptions of consumers, competition, and distribution. The five
projects, and the usefulness of the information they gather, are a follows:
1.
Each year a large number of people are selected in a
nationwide sample and are personally interviewed in their own
homes. The purpose is to determine the brands of razors and
blades used by consumers, and to measure consumers’
attitudes towards both Gillette’s products and competitors’
products.
2.
The company uses a large panel of shavers who are studied
annually through their use of mail questionnaires. These
projects are able to measure brand loyalty and brand
switching because the same individuals are studied year after
year.
3.
Annual telephone surveys provide the company with brand
awareness and advertising awareness information. These
surveys tell the company how it compares with competition on
these two important awareness measures.
4.
Each month the company conducts two or more consumer use
tests, involving both Gillette and competitive brands, in order
to evaluate the strengths of all brands. The tests ensure that
the company’s products are up to standard and that no claims
are made that cannot be substantiated.
5.
Inventory audits are taken regularly at both the retail and
wholesale levels. These provide the company with information
regarding product inventory and display, pricing, out-of-stock,
local advertising and more.
These five projects provide Gillette marketing managers with
information on market shares, brand loyalty and brand switching,
consumer attitudes, brand and advertising awareness, product advantages
versus competition, inventory levels, out-of-stock, retail prices and display,
13
local advertising, and more. As the data are gathered from recurring
studies, the managers have a complete picture of current market and
competitive conditions from the most recent set of studies, and they know
the recent trends that exist in all of these data. All of these items of
information provide the Gillette managers an excellent historical record on
which to base the development of their new marketing plans.
Concluding Comments on Marketing Research Usage
The foregoing discussions and materials show that marketing
research is being used to measure the characteristics of markets, to obtain
information needed for forecasting, to evaluate new-product ideas and
improve existing products, to assist managers in making better advertising
and promotion decisions, and for many other purposes. The role of
marketing research appears to be headed research that may expose their
new product to competitors. In such cases companies try to gain national
distribution as soon as possible and hope to enjoy the advantages
associated with being the first to market such a product.
What Information Sources Are Used?
Where do marketing managers and marketing researchers get the
information they need? All marketing management information comes
either from sources internal to the firm or from external sources. External
sources of information can be further broken down into primary and
secondary sources. Thus marketing management information comes from
(1) sources internal to the firm, (2) primary sources external to the firm,
and (3) secondary sources external to the firm (see table 1).
Some sources are internal to the firm, such as information generated
by the marketing, accounting, and production departments. Their normal
operating responsibilities require that they compile some of the sales and
cost data needed by management. There are also data sources external to
14
the firm, and these can be further classified as primary or secondary data
sources.
Secondary data are those that have been collected by other
organizations; for example, government agencies such as the Commerce
and Labour departments of the federal government, financial organizations
such as Reserve Bank of India, IMF and IBRD; newspapers and magazines
such as the Economic Times and Finance India, trade associations such
as the CCI. Data from these sources are called secondary because these
organizations collect original data, analyse and tabulate these data, but
then publish only summary tables and charts. Users of such data are
limited to what is presented in the summary tables and charts; the original
data are not available to them. As secondary data typically are compiled
for some general audience- not just for a specific manager- it is unlikely
that their form and content will perfectly satisfy a specific manager’s
information needs.
TABLE L: SOURCES OF MARKETING MANAGEMENT INFORMATION
Internal to Firm
External to Firm
15
Sales and costs broken down by
products, markets, and types of
marketing activities (advertising,
promotion, personal selling, etc.)
Primary sources:
Consumers
Retailers and wholesalers
Other
business
firms
Secondary
sources:
Government publications
Trade association publications
Commercial services
Other publications
Primary data are those collected specifically by, or for, the data
users. There is no intervening party to summarize the original data. As the
original data from each unit or respondent are available, they can be
retabulated or re-analysed in as many different ways as managers choose.
Most important, however, is that the data collected are specified in advance
by managers who will use the data; this assures managers that the data
will be tailored to their needs.
Frequently, manager’s need would result in the use of information
from both external and internal sources. For example, the “share of
market” and “percent distribution” may be derived from either primary or
secondary sources. In addition, if both brand awareness and attitude and
performance data are used, they will be primary data. In effect, there may
be numerous management information needs that can be satisfied only by
a systematic integration of external primary and secondary data with the
firm’s internal data.
4.6 MARKETING RESEARCH PROCESS
In planning and designing a specific research project, it is necessary
to anticipate all the steps that must be undertaken if the project is to be
successful in collecting valid and reliable information. If it were broken
down into very small parts or activities, the marketing research process
16
would consist of a great number of steps. On the other hand, if we cluster
the various steps according to major activities, we can view the marketing
research process as consisting of the following eight steps:
•
Formulating the Research Problem
•
Choice of Research Design
•
Determining Sources of Data
•
Designing Data Collection Forms
•
Determining Sampling Design and Sampling Size
•
Organising and Conducting the Field Survey
•
Processing and Analysing the Collected Data
•
Preparing the Research Report
These steps are not a contrived sequence of independent steps; they
consist of a number of interrelated activities. Each step depends to some
extent on each of the others, and the first step must be planned with the
second, third, and remaining steps in mind. For example, one must have
a good understanding of the research objectives in order to identify the
information needed to achieve the research objectives. The form and
content of the “needed information” strongly affects the questionnaire,
which in turn affects how the collected data will be analysed.
Formulating the Research Problem
The first step in research is formulating a research problem. It is
most important stage in applied research as poorly defined problems will
not yield useful results. It is rightly said that “a problem well defined is
half-solved”. Poorly defined problems case confusion and do not allow the
researcher to develop a good research design.
It is difficult to lay down any concise prescription for recognising
problems. A person with an inquisitive nature and the necessary
background would recognise a problem or an opportunity in less time than
another who lacks these qualities. Once the researcher has identified two
17
or more problems or opportunities, the next question he should be
concerned with is- which of the problems is to be selected? This is
necessary as he will not be in a position to take up all the problems on
account of limited finances and time constraints. In such a case he has to
determine properties, carefully examining their importance to his
organisation. Choosing a relatively less important problem would amount
wasting limited resources. He should look into the value and cost aspects.
He should then select that problem which gives the maximum net value of
research.
After a problem has been chosen, the next step is to formulate it
precisely. This too needs a good deal of care on the part of marketing
researchers. Formulation implies a clear statement or definition of the
problem.
A complete problem definition must specify each of the following:
(i)
Population to be analysed
(ii)
Time and geographical boundaries
(iii)
Characteristics of interest- both the ‘results’ that are of
concern to management and the ‘variables’ that are to be
tested for their relationship to the results.
(iv)
Specific environment conditions.
Taken together these four aspects, identify who, when, where and
what of the research. These are briefly explained.
Population to be Analysed
The individuals or objects whose characteristics are to be measured
are called the population or units of analysis. The units always identify the
objects to be studied. It is necessary that the universe is well defined.
18
Consider, for example, the statement- “Women’s dress buyers in Delhi
stores on July 30, 2002”. This specifies a particular universe, provided that
clear definitions are given for ‘Women’s dress buyers’, and ‘Delhi stores’.
Consider another universe- “Women living in the Delhi metropolitan area
who are shopping for one or more dresses in July 2002”. The difference in
the two statements is that whereas the units of the universe are ‘buyers’ in
the former, in the latter they are ‘shoppers’. Also, note another difference
between the two universes. In the first case, the universe indicates ‘Buyers
of women dresses’, implying that the buyer may be either male or female.
But in the second case, only women comprise the universe.
Time and geographical boundaries
As regards time and geographical boundaries, we find that the two
universes are again different. In the first instance, a precise date, viz. 30th
July, 2002 is given while in the second instance the entire month of
January is given Similarly, the two universes are different’ in terms of
space- the ‘buyers’ universe specifies stores located in Delhi while the
‘shoppers’ universe specifies the Delhi Metropolitan area which should be
a larger territory than the former. A more subtle difference between the two
universes can also be seen. The ‘buyers’ universe specifies that buying
takes place in stores located in Delhi. The ‘shoppers’ universe does not
specify as to where shopping takes place. It says that women shoppers
living in the Delhi metropolitan area in July, 2002 are shopping. They may
be shopping outside Delhi as well. Thus in the second case the area in
which shopping occurs is unlimited. As has been mentioned by F .E.
Brown:
Marketing managers continually run the risk of making the right
decision at the wrong time. Opportunities are transient, the marketing
executive who assumes a static environment is doomed to failure.
19
In view of this, it is vitally important that the marketing manager and
researcher decide upon the suitable time reference for the decision.
Characteristic of Interest
This aspect identifies the focus of the problem. In our earlier
example, the characteristics of interest can be style and colour preferences,
buying behaviour, personality traits, etc. Again, the researcher may be
interested in only one characteristic. It is necessary that the problem
definition specify one or more characteristic to be measured and the fact
that the nature of relationship amongst them is to be determined. Thus,
we may like to know more specifically as to what dresses are liked by
educated women or those who are employed. Is there any preference for
store location amongst the members of the universe on account of their
income? This and similar other questions will lead us to focus attention on
the nature of relationships amongst the various characteristics.
Environmental Conditions
This aspect indicates the uniqueness or generality of the problem.
For example, if the management is interested in knowing how the units
respond to price changes, then the problem definition should specify the
prices to be researched. The management is sometimes interested in
knowing the behaviour of certain types of firms under specific economic
conditions. In such cases, the problem definition must spell out those
conditions precisely. In other words, the problem definition must specify
the environment for which the company wants research results. It may also
spell out the possibilities of changes as well as the direction of change in
the environment so that the results of the research study do not become
irrelevant.
It may be emphasised that the problem definition in marketing
research is a step towards identification and structuring of the
20
management’s question. The most important objective of problem
definition, however, should be to answer the right question.
Hypothesis Development
Before we pass on to the next stage, it is worthwhile to briefly
mention the development of hypotheses. A hypothesis is a proposition
which the researcher wants to verify. Often there may be several competing
hypotheses, either specified or implied. If, before undertaking the research,
the researcher finds that all hypotheses are true, then there is no need
whatsoever to undertake research. One objective of research is to select
among the possible hypotheses and to test them empirically with the help
of statistical tools in order to ascertain whether they are true or false.
While the formulation and testing of hypothesis are important in
research, it is not necessary that every marketing research study must
have a hypothesis. In some studies we are only interested in knowing
factual information and hence there is no need for formulating a
hypothesis.
To sum up, a careful formulation of the research problem would be
helpful in providing a sense of direction to the research staff: As it specifies
the precise scope of the problem, it makes research both meaningful and
economical. Further, problem formulation, by setting out assumptions,
would avoid any confusion to the reader. This also gives an idea of the
environment in which the research is to be done, so that focus on the
problem is not lost. Finally, problem formulation would also indicate the
limitations of research itself so that one can see it in a proper perspective.
Choice of Research Design
A research design specifies the methods and procedures for
conducting a particular study. The researcher should specify the approach
he intends to use with respect to the proposed study. Broadly speaking,
21
research designs can be grouped into three categories- exploratory
research, descriptive research and causal research.
A exploratory research focuses on the discovery of ideas and is
generally based on secondary data. It is preliminary investigation which
does not have a rigid design. This is because a researcher engaged in an
exploratory study may have to change his focus as a result of new ideas
and relationship among the variables.
A descriptive study is undertaken when the researcher wants to
know .the characteristics of certain groups such as age, sex, educational
level, income, occupation, etc. In contrast to exploratory studies,
descriptive studies are well structured.
A causal research is undertaken when the researcher is interested
in knowing the cause and effect relationship between two or more
variables. Such studies are based on reasoning along well tested lines.
It may be emphasised that the main criterion of a good research
design is that it must answer the questions posed earlier. Further, the
researcher should select that research design which is appropriate in
achieving the objectives of the study. A point worth emphasising here is
that there is not one ‘best’ research design. There are several alternative
methods for solving a particular problem. Therefore the research should
not be deferred in the quest for the ‘ideal’ research design. It is through
experience that one is able to select the most appropriate research design.
Determining Sources of Data
The next step is to determine the sources of data to be used. The
marketing researcher has to decide whether he has to collect primary data
or depend exclusively on secondary data. Sometimes, the research study
is based on both secondary and primary data.
22
When a study is to be used on secondary data, whether partly or
fully, it is necessary to satisfy oneself that the data are quite suitable for
the objectives spelt out by the study. It is also advisable to evaluate
secondary data in detail to avoid possible sources of error. To begin with,
one should be familiar with the authentic sources of relevant data, their
periodicity, the agency publishing or having such data, the concepts used
in compilation and their limitations, if any. A sincere effort must be made
to look into the existing data with a view to examining their suitability for
the research. It is only when such secondary data are unavailable,
inadequate, or unreliable, that a researcher should decide on collecting
fresh data.
Designing Data Collection Forms
Once the decision in favour of collection of primary data is taken,
one has to decide the mode of collection. The two methods available are
observational method, and survey method.
Observation: This method suggests that data are collected through
one’s observation. If the researcher is a keen observer, with integrity he
would be in a position to observe and record data faithfully and accurately.
While the observation method may be suitable in case of some studies,
several things of interest such as attitudes, opinions, motivations and
other intangible states of mind cannot be observed. Another aspect of this
method is that it is non-reactive as data are collected unobtrusively without
the direct participation of the respondent. This is a major advantage as the
behaviour can be recorded without relying on reports from the
respondents.
Surveys: In marketing research, field surveys are commonly used to
collect primary data from the respondents. Surveys can be (i) personal (ii)
telephonic (iii) by diary. Of these, personal and mail surveys are more
frequently used in India. A choice has to be made regarding the type of
23
survey for collecting data. There are certain advantages and limitations of
each type of survey. Broadly speaking, telephonic survey is suitable when
very limited information is sought in a short period of time. Moreover, such
information should be readily available with the respondents. In contrast,
surveys based on personal interviews are suitable when detailed
information is to be collected. Sometimes a combination of two or more
methods could also be used.
It is a common practice to use structured questionnaires prepared
in advance, to elicit the necessary information from the respondents. In
case the enumerators are to fill up the questionnaires, the survey is a
personal one. It is a mail survey if the information is sought by sending the
questionnaire by post. Whether it is a personal or a mail survey, it is
necessary to design a suitable questionnaire, conduct a pilot survey and
undertake a pre-testing of the questionnaire. The pre-testing will enable
the researcher to realise the shortcomings of his questionnaire. In the light
of this ‘reaction’ of the respondents, coupled with the personal observation
of the researcher, the questionnaire should be modified.
Determining Sampling Design and Sampling Size
Almost all marketing research projects are interested in information
about a large population such as all families with children at home or all
retail grocery stores. As it is impractical to collect data from all members
of such large populations, a sample is selected. Various types of sampling
techniques are possible, but they can be classified into two general
categories- non-probability and probability.
The first task in sampling is to define carefully just what groups of
people, stores, or other units are to be sampled. For example, if the study
calls for collecting data from appliance dealers, it is necessary to define
what is meant by an appliance dealer (are discount stores selling
24
appliances to be included?). It is also necessary to define the precise
geographical area of interest (e.g., the metropolitan Delhi area).
The researcher must then decide on the type of sample which is to
be selected. Probability methods use a procedure that ensures that each
member in the group from which the sample is to be drawn has a known
probability of being chosen.
Non-probability samples can be selected in a variety of ways, but
none of them assures that each member of the population has a known
probability of being selected for the sample. Because of this, non
probability sampling techniques have a greater chance of bias than
probability sampling techniques.
Determining Sample Size
The researcher must also decide how large a sample to select.
Marketing research samples vary from fewer than 10 to several thousand.
The researcher must consider the problem at hand, the budget, and the
accuracy needed in the data before the question of sample size can be
answered.
Besides others sample size is also a source of problems in achieving
the scientific method: Errors resulting from sample size are likely to be
larger when small rather than large samples are used, for small samples
have lower reliability.
Example: If 20 percent of a sample of Delhi’s households reports
that they regularly view a certain television program, a manager can ask:
“How close is this sample estimate to the true percentage that exists among
all Delhi households?” The sample size will be a factor in determining the
answer to this question. If a sample of 1,000 households was used to
gather the information, the manager can be confident that the sample was
large enough to provide an estimate within one or two percentage points of
25
the actual percentage of all Delhi households regularly viewing the
program. If only 50 households were sampled, and 10 households (20
percent) indicated they were regular viewers, the actual percentage of
households viewing the program might be as low as 10 or as high as 30.
The magnitude of potential error from sample size can be calculated
using the theory of sampling statistics if a probability sample is used. That
theory can help researchers determine what sample size is needed for a
given degree of accuracy. The accuracy needed in the study and the costs
of using various size samples will determine the choice and, therefore, the
reliability of the results.
Organising and Conducting the Field Survey
Having prepared the questionnaires and selected the sample design
and size of sample, the next step is to organise and conduct the field
survey. Two important aspects should be looked into interviewing and the
supervision of field work.
The task of interviewing seems to be simple but, in reality, it is one
of the most different tasks in marketing research. This is because
respondents
are
generally
hesitant
in
giving
information
unless
approached with tact, initiative and intelligence. Supervision of field work
is equally important to ensure timely and proper completion of the field
survey. Neglecting these aspects would result in interviewing errors, which,
in turn, would undermine the utility of the survey.
Marketing research interviewing in the field may not be the most
highly regarded of jobs, but it is a vital one, the base on which rests all MR
analysis and the marketing decisions which flow from that. If the initial
data recorded on those Clipboards is flawed then so is every thing else
“Garbage in is garbage out”, quotes Debi Prakash Basn, managing director,
TNS mode. Yet for all its importance, the field force has rarely been
accorded any more respect within the MR profession that it has got outside.
26
Thomas Puliyal, president IMRB stressed the need to give more attention
to field force in terms of performance appraisal, training, building
leadership and so on. Sarang Panchal, executive director, customised
research, AC Nelsen India is of the opinion that the client (company) should
not totally depend on research agency for field operations and due to that
the data collected are many a time not satisfactory. He proposed that the
client, at random, should select a field executive and go and check his field
operations. They should attend first one or two interviews to know that the
questions asked by the field force are adequate for the research objective.
Processing and Analysing the Collected Data
Once the field survey is over and questionnaires have been received,
the next task is to aggregate the data in a meaningful manner. A number
of tables are prepared to bring out the main characteristics of the data. The
researcher should have a well thought out framework for processing and
analysing data, and this should be done prior to the collection. It is
advisable to prepare dummy tables, as such an exercise would indicatethe-nature and extent of tabulation as also the comparisons of data that
can be undertaken.
In order to derive meaningful results from the statistical tables, the
researcher may use one or more of the following four steps: The first step
is to calculate relevant measures of central tendency as also of dispersion,
highlighting the major aspects of the data. The second is to cross-tabulate
the data to ascertain some useful relationships. The third is to calculate
the correlation coefficient and undertake a regression analysis between
variables. The fourth is to undertake a multivariate analysis. Such a
analysis uses a variety of techniques to determine important relationships
amongst several variables.
While designing a research study, the researcher should give
adequate thought to the use of particular analytical techniques. In the
27
recent years, many such analytical techniques have proliferated due to the
emergence of the computer. The researcher now has access to an
increasing assortment of techniques and it is desirable to know well in
advance as to what analytical techniques are going to be used, so that the
data can be collected accordingly.
It is necessary that the researcher gives as much importance to the
analysis and interpretation of data as he has given to their collection. In
the absence of proper analysis, data may be rendered useless resulting in
a waste of time and money.
Preparing the Research Report
Once the data have been tabulated, interpreted and analysed, the
marketing researcher is required to prepare his report embodying the
findings of the research study and his recommendations. As a poor report
on an otherwise good research will considerably undermine its utility, it is
necessary that the researcher gives sufficient thought and care to its
preparation.
Although report writing needs some skill which can be developed
with practice, the researcher should follow the main principles of writing a
report. Some of these principles are objectivity, coherence, clarity in the
presentation of ideas and use of charts and diagrams. The essence of a
good research report is that it effectively communicates its research
findings. As management is generally not interested in detail of the
research design and statistical findings, the research report should not be
loaded with such details, otherwise, there is a strong likelihood of its
remaining unattended on the manager’s desk. In view of this, the
researcher has to exercise extra care to make the report a useful and a
worthwhile document for the management.
Sometimes, a detailed marketing research study throws up one or
more areas where further investigation is needed. Since research on those
28
areas or aspects could not have been fitted into the original project, a
separate follow-up study has to be attempted.
Sometimes, a detailed marketing research study throws up one or
more areas where further investigation is needed. Since research on those
areas could not have been fitted into the original project, a separate followup study has to be attempted.
Conclusion
The marketing research process, as described above, involves
various steps, though strict adherence to each of these steps may not be
necessary. A researcher may deviate from the above sequence and steps
depending on his specific needs. It should be remembered that as research
proceeds from the selection of the theme through the collection and
analysis of data to the preparation of a report, the focus of attention will
move from one activity to the other. This implies that the researcher does
not always concentrate exclusively on the particular phase of research
until its completion.
Further, while it is beneficial to draw a detailed plan and sequence
of various activities in marketing research, it is hardly so if it requires such
financial backing as the firm cannot afford. There is no point in attempting
something which cannot be completed on account of financial constraints
or limitations of time.
Another point worth emphasising is that howsoever elaborate a
research design may be, its successful implementation depends in on small
measure on its management. In fact, the management of research whether
in marketing or in any other field, is of great importance.
29
4.7 SUMMARY
Marketing research is a growing and widely used business activity
because sellers need to know more about their final consumers but
typically are widely separated from those consumers. According to
empirical studies, the vast majority of companies engage in advertising
research, product research, forecasting research, and research to measure
the size and characteristics of their markets. Marketing research is used
throughout all phases of the administrative process: selecting strategies,
developing marketing plans, putting the plans into action, and evaluating
their effectiveness. Some companies are now beginning to coordinate and
integrate their marketing research activities into marketing information
systems designed to provide managers the information they need for
recurring problems and decisions.
Marketing researchers attempt to achieve the research objectives by
using a series of steps referred to collectively as the marketing research
process. The steps represent eight interrelated activities that frequently
overlap one another. They are (1) formulating research problem (2) choice
of research design (3) determining source of data, (4) designing the datacollection project; (5) selecting a sample type and sample size; (6)
organizing the fieldwork; and (7) analyzing the collected data and (8)
reporting the findings.
4.8 KEYWORDS
Market research: It is about determining the characteristics of a
market like size, growth rate, segment, and competitors positioning etc.
Marketing research: besides including market research, it includes
the monitoring of the effectiveness of its advertising, intermediaries,
financing policies and identifying the needs of the consumers.
30
Data-based marketing: The practice of using databases of
customers’ names, addresses, phone numbers, past purchases, responses
to previous offers, and previous decisions etc.
Hypothesis: It is a tentative solution to a problem. Here we take
certain assumptions to research objectives.
Research design: A master plan that specifically identifies what
techniques and procedures will be used to collect and analyse data about
a problem.
Sampling: Any procedure in which a small part of the whole
population is used as the basis for conclusions regarding the whole.
4.9 SELF TEST QUESTIONS
1.
What is “research”? What are the two broad categories in
which it can be divided?
2.
Distinguish between
“problem-solving” and
“problemoriented” research.
3.
What is “marketing research”? Is marketing research a basic
research or an applied research? Why?
4.
Discuss the definition of marketing research as suggested by
the American Marketing Association.
5.
“Marketing research is undertaken to guide managers in the
analysis of marketing problems.” Critically examine this
statement.
6.
How can
marketing
research
management?
31
benefit
marketing
7.
“Many a time management is not convinced about the utility
of marketing research and regards it as an unnecessary
activity over which no funds should be spent”, comment.
7. What factors have contributed to the growth of marketing research
in the western countries?
9.
What is marketing information system? How does it differ from
marketing research?
10.
Marketing research is generally conceded to be essential for
manufacturers, but is it of any real value of retailers and
service organizations? Why?
11.
A sales manager in a firm with a large sales force recently said,
“My sales people give me better information about the market
than I could ever get from our market research department.”
Discuss.
12.
How is marketing research directed toward setting goals arid
establishing strategies likely to be different from marketing
research directed toward the development of a marketing
plan? Explain.
13.
“The Marketing research process involves a number of interrelated activities which overlap and do not rigidly follow a
particular sequence”, comment.
14.
What is the sequence of steps involved in a marketing research
project?
15.
Why is the formulation of a research problem regarded as
important?
32
16.
What is hypothesis? Should every research project have a
hypothesis?
4.10 REFERENCES/SUGGESTED READINGS
1.
G.C. Beri: Marketing Research, Tata McGraw Hill, 3rd edition.
2.
Boyd, Westfall and Stasch: Marketing Research, Richard D.
Irwin, Inc; AITBS, Delhi, 7th Edition.
3.
Copper and Schindler: Business Research Methods,
4.
Green and Tull: Tata McGraw Hill, 6th Ed.
5.
Englewood Cliffs, Research for Marketing Decision, New
Jersers, PHI.
6.
Emory, C. William, Business Research Methods, Homewood,
Illinois, Richard D. Irwin, Inc., 1976, p.7.
7.
Quoted from ‘Marketing Research’ by G.C. Beri. According to
the author the first four applications are based on case studies
and articles published in different issues of Advertising and
Marketing (A&M), a fortnightly magazine published from New
Delhi.
8.
Based on The Strategies Quarterly (The Business Standard
Magazine of Management), January-March, 1996.
9.
Examples 6 and 7 are based on Vibha Gaba: “Tracking the
Users” in The Strategist Quarterly (The Business Standard
Magazine of Management), January-March 1996, pp. 41-44.
10.
Mature Products Remain as the Mainstays in the Gillette Co.,
“Marketing News, June 10, 1983, p.17.
33
11.
Brown, F.E., Marketing Research, Addison Wesley, Chapter
2, p. 35.
12.
Based on ‘Brand Equity’ a weekly supplement to ‘The
Economic Times’, 21st August 2002, page 1-2.
34
LESSON-5 MARKET SEGMENTATION, TARGETING
AND POSITIONING
STRUCTURE
5.0
Objective
5.1
Introduction
5.2
Market segmentation: meaning and definitions
5.3
Levels of market segmentation
5.4
Bases for segmentation
5.5
Criteria for effective targeting of market segments
5.6
Approaches for selecting target markets:
5.7
Product positioning
5.8
Strategies to position products
5.9
Summary
5.10 Keywords
5.11 Self assessment Questions
5.12 References/Suggested readings
5.0 OBJECTIVE
This chapter explores the bases of segmentation and criteria for
segmentation. How the study of segmentation help out companies to target
selected groups. The chapter also stresses that how a company’s products
must be positioned against competitors’ products.
5.1 INTRODUCTION
Marketers can not be all things to all consumers. A firm can not
satisfy every consumer with the same product, no matter how effectively it
1
designs the product and its marketing mix. It happens because customers
are too numerous and diverse in their buying requirements.
For example, if you ask ten people about their favourite level of music or
perfume, you might get ten different answers. In such a case it would be
difficult for one company to meet the needs of each and every consumer.
At the same there, most of the companies can not often a customized
product for every consumer in a market at a cost that all consumers could
afford. In order to develop a successful marketing strategy, marketers must
group consumers into segments that each can be satisfied by a specific
product.
When a firm decides to design a new product, it makes decisions that
it knows it will appeal to some consumers and not to others. Marketers
such as P&G and HLL offer many products in the same category, each of
which is designed to appeal to a specific consumer segment, so that the
company can profit from sales to many diverse segments. Such multiple
product marketers must understand the consumer segments and which
appeals to each of man so not they can design their products accordingly.
In doing so, marketers must adopt three steps of target marketing:
(a)
Identify and profile different group of consumers who differ in
their preferences (segmentation).
(b)
Select one or more market to enter (market targeting)
(c)
For each target segment, establish and communicate the
major distinctive benefits of the company’s market offering
(market positioning)
(Source: Philip Kotler, Marketing Management)
2
5.2 MARKET SEGMENTATION: MEANING AND DEFINITIONS
Market segmentation can be defined as the process of dividing a
market into distinct subsets of consumers with common needs or
characteristics and selecting one or more segments to target with a distinct
marketing mix.
–Schiffman and Kanuk
As per S.J. Skinner: Market segmentation is the process of dividing a
total market into groups of consumers who have relatively similar product
needs.
Rajan Saxena defines segmentation as the process of dividing a
heterogeneous market into homogenous sub units.
So, on the basis of the above definitions, it can be concluded that
segmentation is to divide a market consists of consumers with diverse
characteristic and behaviours into homogenous segments that contain
persons who will all respond similarly to a firm’s marketing effort. When
this is done, the company is in a position to answer “What are our target
markets.”
5.3 LEVELS OF MARKET SEGMENTATION
The number of possible segments that will result from a
segmentation analysis can be as few as one or as many as the total number
of consumers that are in the total market. The marketer’s choice of
segments should reflect actual similarities in consumer background
characteristics and behaviours that will result similar purchase decisions.
Typically, various kinds of markets can result from a segmentation
analysis.
(a)
Mass
Marketing:
In
mass
marketing
consumers
are
indistinguishable and all are in one segment. Here the seller engages in
3
the mass production, mass distribution, and mass promotion of one
product for all buyers. The essence of this strategy was summed up by the
entrepreneur Henry Ford, who offered the Model T automobile to the public
“in any colour they wanted, as long as it was black”. Mass marketing would
be a logical strategy if all consumers were alike regarding their needs,
wants and demands with same background, education and experience. Its
primary advantage is that it costs less. But in the diversified market, this
strategy does not seem logical and ultimately marketers end up with the
strategy of ‘segmented market’.
(b)
Segment Marketing: A segmented market is one in which
meaningful differences among consumers result in a modest number of
segments. Here the segment consists of a group of customers who share a
similar set of wants. The strategy of segmentation allows producers to
avoid head-on competition in the market by differentiating their offerings,
not only on the basis of price, but also through styling, packaging,
promotional appeal, method of distribution, and superior service.
(c)
Niche Marketing: Nowadays marketers are increasingly using
highly focused marketing programmes to target small consumer niches
with products and services that fit their interests and life-styles. Niche
marketing is sometimes also called micro-marketing. Marketers usually
identify niches by dividing a segment into sub-segments. The customers in
the niche have a different set of needs and they are also ready to pay a
premium to the firm that best satisfies their needs. The niche is not likely
to attract competition from the other marketers. For example, Ferrari gets
a high price for its cars because loyal buyers feel no other automobile
comes close to offering the product, service membership benefit bundle
that Ferrari does.
(d)
Local Marketing: When marketing programmes are designed
to cater the needs and wants of local customer groups (trading areas,
neighbourhoods, individual stores). For example Punjab National Bank
4
and State Bank of India provide different mixes of banking services in their
different branches, depending on neighbourhood demographics.
You can always find a vegetable shop near to your locality and in the
same manner a drug store or a retail store so that needs and wants of local
customer groups can be fulfilled.
(e)
Individual Customer Marketing: When a marketer detects as
many segments as there are consumers, so that each segment is composed
of only one consumer, it has been identified an individual marketing or a
customized marketing. This results when the marketer believes that no two
consumers will respond the same way to its marketing efforts. As a result,
the marketer is forced to produce a customized product specifically
designed and positioned for each consumer to whom it wants to market.
Health and exercise marketers provide examples of customized marketing.
They are the personal trainers who develop a customized exercise
programmes for their clients and exercise with them on individual basis.
Today the information revolution is enabling a growing number of
companies to mass-customize their offerings. Mass-customisation is the
ability of a company to prepare on a mass basis individually designed
products, services, programmes, and communication to meet each
customer’s requirements. It is a strategy that mobilizes the combined
power of mass production technologies and computers to make varied,
customized products for individual customers.
5.4 BASES FOR SEGMENTATION
The first step in developing a segmentation strategy is to select the
most appropriate bases on which to segment the market. Five major
categories of consumer characteristics provide the most popular bases for
market segmentation. They include geographic factors, demographic
factors, psychological factors, socio-cultural variables, and use related
factors etc. Let’s discus these factors in brief.
5
(a)
Geographical Segmentation: In geographic segmentation,
the market is divided by location. The theory behind this strategy is that
people who live in the same area share some similar needs and wants and
that these needs and wants differ from those of people living in other areas.
For example, certain food products sell better in one region than in others.
Some marketing theorists and marketing practitioners believe that
worldwide satellite television transmission and global communication
networks have erased all regional boundaries and therefore, that
geographic segmentation should be replaced by a single global marketing
strategy. Other marketers, have, for a number of years, been moving in the
opposite direction and developing highly regionalised marketing strategies.
In summer, geographic segmentation is a useful strategy for many
marketers. It is relatively easy to find geographically based differences for
many products. In addition, geographic segments can easily be reached
through
the
local
media,
including
newspapers,
TV,
and
radio,
advertisement through regional editions of magazines.
(b)
Demographic Segmentation: Demographic characteristic,
such as age, sex, martial status, income, occupation and education are
most often used as the basis for market segmentation. Demography refers
to the vital and measurable statistics of a population Demographics help
to locate a target market, whereas psychological and socio-cultural
characteristics help to describe how its members think and how they feel.
Demographic information is the most accessible and costeffective - Way to
identify a target market. Indeed, most secondary data, including census
data, are expressed in demographic terms. Demographics are easier to
measure than other segmentation variables. They are invariably included
in psychographic and socio-cultural studies, because they add meaning to
the findings. Demographic variable reveal ongoing trends, such as shifts
in age, sex (gender), and income distributions, that signal business
opportunities.
6
(c)
Psychological/Psychographic Segmentation: Psychological
characteristics refer to the inner or intrinsic qualities of the individual
consumer. Consumer segmentation strategies are often based on specific
psychological variables. For instance, consumers may be segmented in
terms of their needs and motivations, personality, perceptions, learning,
level of involvement, and attitudes. For example Colgate Palmolive, AT & T
services, Kentucky fried Chicken and Nescafe Coffee. Marketers conduct
psychographic research to capture insights and create profiles of the
consumers they wish to target.
(d)
Socio-cultural Segmentation: Sociology and anthropological
variables- that is, socio-cultural variables- provide further bases for
market segmentation. For example, consumer markets have been
successfully subdivided into segments on the basis of stage in the family
life cycle, social class, core cultural values, sub-cultural memberships, and
cross-cultural affiliation.
Family Life Cycle: Family life cycle segmentation is based on the
premise that many families pass through similar phases in their formation,
growth and final dissolution. At each phase the family unit needs different
products and services. Family life cycle is a composite variable based
explicitly on marital and family status, but implicity including relative age,
income, and employment status. Each of the stages in the traditional
family life cycle (Le. bachelorhood, honeymooners, parenthood, past
parenthood, and dissolution) represents an important target segment to a
variety of marketers.
Social Class: Social class (or relative status in the community) is a
potential segmentation variable. It is traditionally “measured” by a
weighted index of several demographic variables, such as education,
occupation, and income. The concept of social class implies a hierarchy in
which individuals in the same class generally have the same degree of
status, while members of other classes have either higher or lower status.
7
Marketers regularly have used their knowledge of social class differences
to appeal up specific segments. Many major banks, for example, offer a
variety of different levels of service to people of different social classes. (e.g.
private banking services to the upper classes).
Culture, Subculture and Cross Culture: Some marketers have found
it useful to segment their domestic and international markets on the basis
of cultural heritage, because members of the same culture trend to share
the same values, beliefs, and customs. Marketers who use cultural
segmentation stress specific, widely held cultural values with which they
hope consumers will identify. Cultural segmentation is particularly
successful in international marketing, but in such instances, it is
important for the marketer to understand fully the beliefs, values, and
customs of the countries in which the product is marketed.
(e)
Use-Related Segmentation: An extremely popular and
effective form of segmentation categories consumers in terms of product,
service, or brand usage characteristics, such as usage rate, awareness
status, and degree of brand loyalty. Rate of usage segmentation
differentiates among heavy users, medium users, light users, and non
users of a specific product, service or brand”. Marketers of a host of other
products have also found that a relatively small group of heavy users
account for a disproportionately large percentage of product usage and
that targeting these heavy users has become the basis of their marketing
strategy. Other marketers take note of the gaps in market coverage for light
and medium users and profitably target these segments. Awareness status
encompasses the notion of consumer awareness, interval, level, on buyer
readiness. Marketers have to determine whether potential consumers are
aware of the product, interests in the product, or need to be informed about
the product. Sometimes, branch loyalty is used as the basis for
segmentation. Marketers often try to identify the characteristics of their
8
brand loyal consumers so that they can direct their promotional efforts to
people with similar characteristics in the larger population.
5.5 CRITERIA FOR EFFECTIVE TARGETING OF MARKET SEGMENTS
The previous sections have described various bases on which
consumers can be clustered into homogenous market segments. The next
challenge for the marketer is to select one or more segment to target with
an appropriate marketing mix. To be an effective target, a market segment
should be (I) identifiable, (2) sufficient (in terms of size), (3) stable or
growing, and (4) reachable (accessible) in terms of media and cost.
Identification: To divide the market into separate segments on the
basis of a common need or characteristics that is relevant to the product
or service, marketers must be able to identify the relevant characteristic.
Some
segmentation
variables
such
as
geography
(location)
or
demographics (age, gender, occupation are relatively easy to identify or are
even observable. Others, such as education, income, or marital status, can
be determined through questionnaires. Still other characteristics, such as
benefits sought or life style, are more difficult to identify. The knowledge of
consumer behaviour is especially useful to marketers who use such
intangible consumer characteristics as the basis for market segmentation.
Sufficiency: For a market segment to be worldwide target, it must
have a sufficient number of people to warrant tailoring a product or
promotional campaign to its specific needs or interests to estimate the size
of each segment under consideration, marketers often use secondary
demographic data.
Stability: Most marketers prefer to target consumer segments that
are relatively stable in terms of demographic and psychological factors and
needs and that are likely to grow larger over time. They prefer to avoid
“Fickle” segments that are unpredictable in embracing facts. For example,
teens are a sizeable and easily available market segment, eager to buy, able
9
to spend, and easily reached. Yet, by the time a marketer produces
merchandise for a popular teenage fad, interest in it may have wanted.
Accessibility: A fourth requirement for effective targeting is
accessibility, which means that marketers must be able to reach the
market segments they want to target in an economical way. Despite the
wide availability of special interest magazines and cable TV programmes,
marketers are constantly looking for new media that will enable them to
reach their target markets with a minimum of waste circulation and
competition.
5.6 APPROACHES FOR SELECTING TARGET MARKETS:
Once a firm understand its markets and the appropriate bases for
segmenting those markets, it must choose an approach for selecting its
target markets. There are three different approaches for selecting target
markets: the undifferentiated approach, the concentration approach;
approach, and the multi segment approach.
(a)
Undifferentiated Approach: In the undifferentiated (or
totalmarket) approach, a company develops a single marketing mix and
directs it at the entire market for a particular product. This approach is
used when an organisation defines the total market for a particular
product as its target market. A company using the undifferentiated
approach assumes that individual customers in the target market for a
specific type of product have similar needs. Therefore, the firm creates a
single marketing mix that it hopes will satisfy most of those customers.
The company makes the type of product with little or no variation, sets one
price, designs one promotional programme aimed at everyone, and
establishes one distribution system to reach all customers in the total
market.
Products
that
can
be
marketed
successfully
with
the
undifferentiated approach include staple food items such as sugar and
10
salt, certain kinds of farm produce, and other goods that most customers
think of as identical to competing products.
Companies that use the undifferentiated approach often try to
distinguish their own products from competitors’ products through
marketing activities. When a company tries to convince consumers that its
products are superior and preferable to competing brands, it is utilizing
product differentiation.
Product differentiation enables a firm to distinguish its product from
competitors’
products
without
dramatically
altering
the
physical
characteristic of the product. For instance, if a gasoline company marketed
unloaded gasoline to the total market without product differentiation, it
would be difficult for consumers to select one type of gasoline over another.
By using product differentiation such as promotions that claim its gasoline
provides better mileage, clean engines, or eliminates engine knock an oil
company can differentiate its gasoline from that of its competition for
product differentiation to be effective, the characteristic used to distinguish
one brand from another must be important to a large number of consumers
in the total market.
(b)
Concentration Approach: When an organisation directs its
marketing efforts toward a single market segment through a single
marketing mix, it is using a concentration approach.
A major advantage of the concentration approach is that it allows a
company to focus all its marketing efforts on a single segment. The
company can analyse the characteristics and needs of distinct customer
group and then direct all its efforts toward satisfying that groups needs. A
firm can generate a large volume of sales by reaching a single segment. The
concentration approach also enables a firm with limited resources to
compete with larger organizations, in the same market.
11
A major disadvantage of the concentration approach is that if a
company depends on a single market segment for its sale and that
segment’s demand for the product declines, the company’s sales and
profits will also decline. Moreover, when a firm dominates one segment of
a market, its popularity and reputation may keep it from moving into other
segments.
(c)
Multi-segment
Approach:
An
organisation
using
the
multisegment approach directs its marketing efforts at two or more
segments by developing a marketing mix for each segment.
A firm may use the multi segment approach after successfully using
the concentration approach on one market segment and expanding to
other segments.
A business using-the multi segment approach can usually increase
its sales in the total market by focusing on more than one segment because
the firm’s mixes are reaching more people. A firm with excess production
capacity may find the multi segment approach practical because the
development of products for additional market segments may use up the
excess capacity. However production and marketing costs may be higher
with the multi-segment approach because it often requires a great number
of production processes, materials, and skills, as well as several different
promotion, pricing and distribution methods.
5.7 PRODUCT POSITIONING
Once the market has been segmented and attractive segments have
been identified, the next task is to work within a targeted segment to
position the product in the minds of the consumers and develop a
marketing mix that will satisfy the consumer.
Product Positioning: Product positioning is the creation of a clear
image in the minds of consumers within the targeted segment about the
12
nature of the product and the benefits to be gained from purchasing the
product. Positioning is the complement of segmentation. That is,
segmentation identifies those segments of the population that will act
similarly and develops products to meet each segment’s needs, whereas,
positioning in conveys information about the products back to the
segments for which they are appropriate.
Product positioning is achieved through a wide variety of marketing
mix programmes in product design, pricing, distribution, and promotion
consumer background characteristics are addressed primarily by creating
advertising that features individuals who possess the characteristics of the
target segment, but pricing must also be suitable for the economic
attributes of the target market, and distribution must occur in the
appropriate geographical areas. For example, Mercedes Benz advertises in
magazines that reach upscale audiences and situates dealership in areas
frequented by high income consumers.
Motivation and needs shape the product design by dictating the
benefits the product must offer to its purchases. The level of motivation,
through its influence the effort consumers will exert in perceiving and
learning about the product as well as the strength of the attitudes they
hold about the product. The box below discusses the pleasures of
consumption that come from sharing a purchase experience with others in
a reference group who share common background characteristics.
5.8 STRATEGIES TO POSITION PRODUCTS
Many ways exist for positioning a product or service (or even an
organisation). The following illustrate some of these approaches. It should
be noted that combinations of these approaches are also possible.
13
(i)
Position on Product Features: The product may be
positioned on the basis of product features. For example, an advertisement
may attempt to position the product by reference to its specific features.
Although this may be a successful way to indicate product superiority,
consumers are generally more interested in what such features mean to
them, that is, how they can benefit by the product.
(ii)
Position on Benefits: This approach is closely related to the
previous method. Toothpaste advertising often features the benefit
approach, as the examples of crest (decay prevention), close-up (sex appeal
through white teeth and fresh breath), and Aquafresh (a combination of
these benefits) illustrate.
Position on Usage: This technique is related to benefit positioning.
Many products are sold on the basis of their consumer usage situation.
Companies have sometimes sought to broaden their brand’s association
with a particular usage or situation. Campbells soup for many years was
positioned for use at lunch time and advertised extensively over noon time
radio. It now stresses a variety of uses for soup (recipes are on labels) and
a broader time for consumption, with the more general theme “Soup is good
food”.
(iv)
Position on User: This approach associates the product with
a user or a class of users. Some cosmetics companies seek a successful,
highly visible model as their spokesperson as the association for their
brand. Other brands may pick a lesser known model to portray a certain
lifestyle in its ads. (revlon’s charlie cosmetic line, for example).
(v)
Position Against Competition: Often, success for a company
involves looking for weak points in the positions of its competitors and
them launching marketing attacks· against those weak points. In this
approach, the marketer may either directly on indirectly make comparison
14
with competing products. For example, the famous “Uncola” campaign
successfully positioned up as an alternative to coke, Pepsi and other colas.
5.9 SUMMARY
In this chapter, many consumer characteristics were presented. All
of these consumer attributes were discussed within the framework of
market segmentation that is, an approach to selecting groups of
homogenous consumers as targets for marketing activity. Whereas market
segmentation seeks to carve a large, heterogeneous market into smaller,
more uniform subdivision, at the other end of the strategy spectrum
market aggregation no subdivision of the market is applied. Most firms
today follow a market segmentation approach. Furthermore, it was shown
that in order for market segmentation to be effective, the target group must
be identifiable and measurable; accessible; substantial; and responsive.
With these criteria in mind, four alternative bases for segmentation were
discussed demographic, lifestyle, usage and benefit. Some newer
approaches to market segmentation were also presented. Traditional
approaches, however, are still incorporated in these techniques because
marketers must have demographic, geographic, and socioeconomic
information about any segments chosen if they are to market effectively to
them. The close interrelationship between market segmentation and
product positioning was also discussed. Several approaches to product and
company positioning were described along with analytical methods for
making such decisions.
5.10 KEYWORDS
Mass customization: A strategy that combines mass production
with computers to produce customized products for small market
segments.
15
Benefit segmentation: A kind of market segmentation by which
consumers are grouped according to the specific benefits they seek from a
product.
Repositioning: Rethinking regarding the benefits that are offered to
consumers through the marketing mix.
Differentiated marketing: A marketing approach in which a
marketer selects more than one target market and then develops a separate
marketing mix for each market.
Undifferentiated marketing: A marketing approach not targeted at
a specific market segment but designed to appeal to a broad range of
customers.
5.11 SELF ASSESSMENT QUESTIONS
1.
Define Segmentation. Also describe the various levels of
segmentation.
2.
Write down the various bases for segmentation. In your
opinion which base(s) in more relevant than others and why?
3.
What criteria you will adopt to make your-segmentation
process more effective?
4.
Write a detailed note on various approaches for selecting
target markets.
5.
What do you understand by product positioning? Describe in
detail various positioning strategies.
6.
Write short notes on the following:
(a)
Mass Marketing
(b)
Niche Marketing
16
(c)
Concentration approach
(d)
Position against competition
5.12 REFERENCES/SUGGESTED READINGS
(l)
Marketing Management by Philip Kotler.
(2)
Marketing by Stanton.
(3)
Marketing Management by Ramaswamy and NamaKumari.
(4)
Marketing by Skinner.
17
LESSON-6 PRODUCT DECISIONS: PRODUCT LIFE
CYCLE AND PRODUCT MIX
STRUCTURE
6.0
Objective
6.1
Product defined
6.2
Product classification
6.2.1 Consumer goods
6.2.2 Industrial Goods
6.3
The product life cycle
6.3.1 Life Cycle Stages and their Associated Strategies
6.3.2 The Product Life-Cycle as a Management Tool
6.4
Product mix
6.5
Product line
6.5.1 Managing Line Extensions
6.6
Summary
6.7
Keywords
6.8
Self Assessment questions
6.9
References/Suggested readings
6.0 OBJECTIVE
After reading this lesson, you must be able to discuss
•
the concept of product and the importance of product
decisions in the overall business strategy of the enterprise;
•
how the products are classified;
•
to focus attention on product life cycle and the strategies that
the firms adopt at each stage of the life cycle; and
1
•
the concept of product line and product mix and strategies to
manage them.
6.1 PRODUCT DEFINED
(i)
A product is anything that can be offered to a market to satisfy
a want or need.
(ii)
A product is “a set of tangible and intangible attributes,
including packaging, colour, price, manufacturer’s prestige,
retailer’s prestige, manufacturer’s and retailer’s services,
which the buyer may accept as offering satisfaction of wants or
needs.
It may be emphasized, as brought out in these definitions, that
customers buy a product not only for “what it is” but also for “what it
means” to them. A person buys a refrigerator not only for what it will do for
him in terms of providing him physical need satisfaction but also for the
social prestige and ego satisfaction that he derives from its possession.
People buy things which agree with their self-image and selfconcept. If a
person perceives himself as a upper class professional, he will buy a
product which will reinforce this self-concept.
Products that are marketed include physical goods, services,
experiences,
events,
persons,
places,
properties,
organizations,
information, and ideas.
Product Leve1s
In planning its market offering, the marketer needs to think through
five levels of the product. Each level adds more customer value, and the five
levels constitute a customer value hierarchy. The most fundamental level
is the core benefit: the fundamental service or benefit that the customer is
2
really buying. A hotel guest is buying “rest and sleep”. The purchaser of a
drill is buying “holes”. Marketers must see themselves as benefit providers.
At the second level, the marketer has to turn the core benefit into a
basic product. Thus a hotel room includes a bed, bathroom, towels, desk,
etc.
At the third level, the marketer prepares an expected product, a set
of attributes and conditions buyers normally expect when they purchase
this product. Hotel guests expect a clean bed, fresh towels, working lamps,
and a relative degree of quiet. Because most hotels can meet this minimum
expectation, the traveller normally will settle for whichever hotel is the most
convenient or least expensive.
At the fourth level, the marketer prepares an augmented product that
exceeds customer expectations. A hotel can include a remote-control
television set, fresh flowers, rapid check-in, express checkout, and fine
dining and room service.
Today’s
competition
essentially
takes
place
at
the
product
augmentation level. Some important points should be noted about product
augmentation strategy. First, each augmentation adds cost. The marketer
has to ask whether customers will pay enough to cover the extra cost.
Second, augmented benefits soon become expected benefits. Today’s hotel
guests expect a remote-control television set and other amenities. This
means that competitors will have to search for still other features and
benefits. Third, as companies raise the price of their augmented product,
some competitors can offer a “stripped-down” version at a much lower price.
At the fifth level stands the potential product, which encompasses all
the possible augmentations and transformations the product might
undergo in the future. Here is where companies search for new ways to
satisfy customers and distinguish their offer. All-suite hotels where the
3
guest occupies a set of rooms represent an innovative transformation of the
traditional hotel product.
Successful companies add benefits to their offering that not only
satisfy customers but also surprise and delight them. Delighting is a matter
of exceeding expectations.
Potential Product
Augmented Product
Expected Product
Basic Product
Core
Benefit
Fig. 1: Five Product Levels
Importance of Product in Marketing-Mix
Product is the most powerful competitive tool in the hands of a
marketing manager. It lies at the heart of marketing mix, and all its other
elements including pricing, distribution and promotion depend on the
product positioning in the market. Product types, quality, features and
design largely determine production and marketing cost, and consequently
exercise a major influence on price. These aspects of a product also playa
major role in the determination of a firm’s competitive strategy. If a
manufacturer’s product cannot be differentiated from that of his
competitors, he may have to take recourse to price competition in order to
attain the targeted sales volume or market share. On the other hand, if the
product is of a type which can be differentiated from competing products
as in the case of radios, refrigerators, soaps, etc., a marketing manager may
4
put his major trust in non-price competition. He may seek to attract
customers to his product by building style, special features, reliability,
quality, etc., in the product.
Product also acts as a determining factor in the choice of channel of
distribution. If the product is a complex industrial machine or component
part used by other manufacturers, it is likely to be sold directly by the
manufacturer without using any middlemen. A mass consumption product
such as toothpaste needs a very wide network of distribution, and every
grocer and general merchandiser will have to be contacted either by the
manufacturer’s salesman or wholesaler. Speciality goods such as fans and
transistors need a different kind ~f distribution channel than shopping
goods.
Finally, promotion strategy also revolves around the product.
Whether major thrust in promotion will be on personal selling, advertising
or sales promotion significantly depends on the product type. Industrial
goods
generally
need
major
emphasis
on
personal selling.
Mass
consumption products need major emphasis on advertising and sales
promotion.
The basic purpose of the existence of a business enterprise is to
produce and market a product that will provide satisfaction to its
customers. If a company is unable to perform this basic function efficiently
and effectively, it will be driven out of business by competition. Thus, a firm
which fails to perform its social function of providing need satisfaction to
consumers loses social patronage and ceases to exist.
In the final analysis its ability to meet customers’ need depends on
the product which it supplies to the market.
A firm’s products thus play a crucial role not only in its marketing
success but also in its existence as a competitive business entity. It should,
5
therefore, devotes considerable attention to the determination of its product
objectives and formulation of its product strategy.
6.2 PRODUCT CLASSIFICATION
We are aware that a product has many intangible as well as tangible
attributes. With this broad perspective in mind, it is now appropriate to
consider products in identifiable groups. This can be done formally using a
classification system which aids market planning.
Staple Convenience
Goods
CONVENIENCE
GOODS
Impulse
Convenience Goods
Homogeneous
Convenience Goods
SHOPPING
GOODS
Heterogeneous
Convenience Goods
SPECIALITY
GOODS
CONSUMER
GOODS
UNSOUGHT
GOODS
Fig. 2: Classification System for Consumer Goods
6.2.1 Consumer goods
Figure 2 shows different sub-categorizations for consumer goods.
1. Convenience Goods: These are usually relatively inexpensive
items whose purchase requires very little effort on the part of the consumer.
The weekly shopping list, for the most part, is composed of convenience
goods. The decision process is complicated by the existence of brands which
6
force the consumer to make comparison and choices. One of the principal
tasks of advertising is to try to predetermine the purchase decision for
convenience goods so that the consumer always buys, or mentally lists, a
certain brand rather than first thinking of the generic product and then
making a brand-choice decision.
Convenience goods can be further classified into (i) staple and (ii)
impulse items.
(i)
Staple convenience goods: Staple convenience goods are those
consumed by most people every day (e.g. milk, bread and potatoes). Product
differentiation for staple items tends to be minimal. If a sudden need arises
for a product, or it has been overlooked during a major shopping outing,
then even less thought is put into the purchase decision.
(ii)
Impulse convenience goods: As the name implies, there is no
pre-planning involved with the purchase of impulse convenience goods. The
decision to make an impulse purchase is made on the spot.
2.
Shopping Goods: This classification includes major durable or
semi-durable items. Because shopping goods are generally more expensive
than convenience goods and the purchases are less frequent, shopping
goods purchase are characterized by pre-planning, information search and
price comparisons. The purchase of a car, for example, will involve
extensive consideration of the relative merits of the products on offer. In
addition to product features the consumer will consider price, place of
purchase, purchase (credit) terms, delivery arrangements, aftersales
service and guarantees. The quality of sales staff in stores is critical to the
success of the marketing of shopping goods.
Shopping goods can be further classified as homogeneous or
heterogeneous items.
7
Homogeneous goods: White goods such as washing machines,
refrigerators etc. are homogeneous in nature. These are goods which are
virtual necessities, and in market terms, they are not particularly far apart
from each other in terms of price, prestige or image.
Heterogeneous goods: Heterogeneous shopping goods are stylized and
non-standard. Here, price is of secondary importance to the consumer after
image. Behavioural factors play an important role in the purchase decision.
3.
Speciality Goods: The purchase of speciality goods is
characterized by extensive search and extreme reluctance to accept
substitutes once the purchase choice has been made. The market for such
goods is small but prices and profits are high. Consumers of speciality
goods pay for prestige as well as the product itself. Companies who market
these goods must be particularly skilful at creating and preserving the
correct image. If the marketing is successful, the customer’s search period
can be reduced or almost eliminated in some cases. For instance, some
consumers will decide on a particular designer label for clothes or jewellery
long before the actual purchase is considered.
4.
Unsought Goods: Promoting and selling ‘unsought’ goods
makes up the area of marketing which is most susceptible to criticism. By
definition, the customers have not considered their purchase before being
made aware of them, and could often do without them.
The consumer may be at a disadvantage when confronted with
unsought goods because they probably will have been no opportunity for
evaluation and comparison. The consumer may also be suspicious of any
‘offer’. Unsought goods must therefore be marketed in a sensitive manner.
The methods of marketing usually employed are direct mail, telephone
campaigns, door-to-door canvassing and the dubious practice of ‘sagging’
(selling under the guise of market research).
8
The marketing implication of this system of classification is that it
accurately reflects buying behaviour for large groups of consumers.
Naturally, a company is likely to segment its market within a given product
class, but the classification system allows for a basic understanding of
buyer behaviour as a function of the product.
6.2.2 Industrial Goods
The classification of industrial goods gives an insight into the uses to
which the goods are put, and the reasons for their purchase, allowing a
better understanding of the market, and therefore better strategy design.
INDUSTRIAL GOODS
INSTALLATIONS
ACCESSORIES
COMPONENTS
RAW MATERIALS
SUPPLIES
Fig. 3: Classification of Industrial Goods
However, the company could not function without a whole range of
other items which, while not being integral to the manufacturing process,
are nevertheless essential to the overall running of the company. For
example, any company needs office furniture and equipment, stationery
and cleaning materials which are all ancillary to the manufacturing
process.
Goods required by industry are shown in Figure 3 and classified into
the formal groups described below:
9
1.
Installations: These are the most expensive and critical
purchases a company has to make. They are the major items of plant and
machinery which are required for the production of a company’s product.
If a company makes a mistake in its choice of office equipment or building
maintenance services this can be costly, but it is unlikely to seriously
threaten the company’s future. However, if a range of machinery is
purchased which is subsequently found to be unsuitable; this could
jeopardize the complete production base. The purchase of installations is,
therefore, the result of a very extensive search process. Although price is
very important in such a decision, it is almost never the single deciding
factor. Much emphasis is placed on the quality of sales support and advice
and subsequent technical support & after-sales service.
2.
Accessories: Like installations, these are considered as capital
items, but they are usually less expensive and are depreciated over fewer
years. Their purchase is important for the company, but not as critical as
installation purchase. Accessories include ancillary plant and machinery,
office equipment and office furniture. In the case, of say, a haulage
company, forklift trucks, warehousing equipment and smaller vehicles
would be classified as accessories.
3.
Raw Materials: The purchase of raw materials probably
accounts for most of the time and work-load of a typical purchasing
department. There is a direct relationship between raw material quality and
the quality of the company’s own finished product. Therefore it is vital that
quality, consistency of supply, service and price are optimized.
Price is particularly important because these goods are purchased
throughout the year and have a direct and continuous effect on costs.
4.
Component Parts and Materials: The supply considerations
for these items are similar to those for raw materials. Component parts and
materials include replacement and maintenance items for manufacturing
10
machinery. In this sense they should not be confused with ‘accessories’.
This category also includes those products which facilitate or are essential
in the manufacturing process but which do not form part of the finished
product, e.g. oils, chemicals, adhesives and packaging materials.
5.
Supplies: These can be likened to the ‘convenience goods’ of
industrial supply. They are probably taken for granted by most company
employees and include such goods as office stationery, cleaning materials
and goods required for general maintenance and repairs. The purchasing
process is often routine and undertaken by less senior employees. Most
supplies are relatively homogeneous in nature and thus price is likely to be
a major factor in the purchasing decision.
The industrial product classification system can be linked closely to
industrial buying behaviour. It is a common misconception to regard all
industrial purchasing as being rigid routinely in its logic. It is true that the
industrial buyer is dealing with someone else’s money and the amounts are
usually large in comparison to individual consumer purchases. This means
that the consequences of error are far graver. Industrial decision-making is
therefore generally more considered than individual consumer behaviour.
Industrial buyers are, nevertheless, human beings, and they base decisions
upon a variety of criteria in addition to those of price, quality and delivery.
6.3 THE PRODUCT LIFE CYCLE
The idea of a product life cycle (PLC) is central to product strategy. It
is based on the premise that a new product enters a ‘life cycle’ once it is
launched in the market. The product has a ‘birth’ and a ‘death’- its
introduction and decline. The intervening period is characterized by growth
and maturity. By considering a product’s course through the market in this
way, it is possible to design marketing strategies appropriate to the relevant
stage in the product’s life. In addition to the stages outlined, an additional
11
stage is often discussed- that of saturation, a levelling off in sales once
maturity is reached and prior to decline.
Fig. 4: Stages of Product Life Cycle
Figure 4 shows the courses for the hypothetical life cycles of two
different products. Because the marketing environment is essentially
dynamic, even basically similar products are likely to react differently
during their life span. The PLC is influenced by the following factors:
1.
The intrinsic nature of the product itself
2.
Changes in the macro-environment
3.
Changes in consumer preferences, which are affected by the
macro-and microen-vironment
4.
Competitive action
In strategic terms, the task of marketing management is to:
1.
Estimate the likely shape of the total curve
2.
Design an appropriate strategy for each stage
3.
Identify the product’s movement from one stage to another
12
The last task is perhaps the most difficult, because the designation
of each stage is somewhat arbitrary. The value of the concept is that once
the stage has been identified, markets can be seen to display certain
characteristics which suggest specific strategic reactions.
6.3.1 Life Cycle Stages and their Associated Strategies
1. Introductory Stage: This is the period relating to a new product
launch and its duration depends- on the product’s rate of penetration
through the market segment concerned. The period ends when awareness
of the product is high enough to attract wider user groups so that sales are
correspondingly increased. The typical conditions associated with the
introduction stage are:
•
A high product failure rate
•
Relatively few competitors
•
Limited distribution (often exclusive or selective distribution)
•
Frequent product modifications
Company losses, because development costs have not yet been
recouped, promotional expenditure is relatively high in relation to sales and
economies of scale are not yet possible.
The prime goal at this stage is to create awareness. This usually
involves a disproportionate level of marketing expenditure relative to sales
revenue. Clearly, this must be regarded as an investment in the product’s
future.
The introductory pricing strategy will depend on the type of product
in terms of its degree of distinctiveness. The company may wish to achieve
high sales levels in a short span of time or slowly establish a profitable
niche in the market place.
The firm has two basic strategic options open to it.
13
1.
A skimming pricing strategy involves the application of a high
price to a small target group of consumers, the innovators and
early adopters. While the product remains distinctive, growth
can be encouraged by a planned series of progres-sive price
reductions.
2.
A penetration pricing strategy is employed to attract the largest
possible number of new buyers early in the product’s life. It
involves pricing the product at a low level and is appropriate
where demand is elastic and where there is a high level of
competitive activity.
In both cases, the role of pricing at this stage of the life cycle is to
establish the product in such a way as to permit further strategy to be
implemented in the subsequent stages. A skimming approach, for example,
should ‘set the scene’ for product distinctiveness to be retained for as long
as possible. While profits are not necessarily forthcoming during
introduction, the introductory pricing strategy should prepare for
profitability in the future.
Distribution decisions will be determined by expected penetration or
skimming. In all cases, it is of paramount importance that the product is
available to the intended market. Ineffective distribution has invalidated the
costly efforts of the other marketing functions of many companies. Out-ofstock situations provide competitors with opportunities to take market
share and it can be costly to win it back.
2. Growth Stage: During growth stage the product is still vulnerable
to failure (although most failures occur early in the product’s life).
Competitive products, perhaps launched by more powerful firms, can enter
the market at this stage. These may pose a threat sufficient to cause some
firms to withdraw from the market. In general, the characteristics of growth
are:
14
•
More competitors and less product distinctiveness
•
More profitable returns
•
Rising sales
•
Company or product acquisition by larger competitors
Promotional expenditure should still feature highly in the marketing
budget at this stage because this is the best time to acquire market share.
It should, however, be at a level which does not drain profits, although it is
not unusual for very high levels of expenditure to continue throughout
growth in order to achieve profitable market dominance during the maturity
stage.
Distribution retains its importance during growth. In consumer
markets, in particular success will depend on finding shelf space in retail
outlets, which now tends to be controlled by a small number of powerful
mu1tiple operators. Once a ‘hierarchy’ of brand leaders has been
established, powerful buyers in retail multiples will attempt to rationalize
their list of suppliers. Distribution will be a key factor in such decisions,
because retailers will wish to keep their stock levels to a minimum. In other
markets, distribution is equally important because during growth,
suppliers will be in competition with each other to acquire dealership and
distributive outlets.
A company must attempt to optimize the product’s price during
growth and it is likely that towards the end of this period, there is the
opportunity to maximize profits. Paradoxically, the end of growth is
sometimes characterized by reduced prices (even though profits may be still
high). This is because the full effect of economies of scale is often passed
on to customers. As the growth period tends towards maturity, market
shares will tend to stabilize and a hierarchy of brand or market leaders will
probably have emerged.
15
3. Maturity Stage: Due to the time-scales of PLCs, at anyone time,
the majority of products are in the maturity stage of the life cycle. Much
marketing activity is devoted to this stage. The major characteristics of the
maturity stage are:
•
Sales continuing to grow, but at a very much decreased rate
•
Attempts to differentiate and re-differentiate the product
•
Prices beginning to fall in battles to retain market share. Profits
begin to fall correspondingly
•
Increasing brand and inventory rationalization amongst
retailers and distributors
•
Marginal manufacturers retiring from the market when faced
with severe com-petition and reduced margins
It should be emphasized that market growth has ceased by this stage.
Any growth can only be achieved at the expense of competitors. There is,
therefore, a need for sustained promotional activity, even if only to retain
existing customers. Deciding the level of promotional expenditure can be a
problem in view of contracting profit margins.
In line with the aims of promotion, distribution strategy should be
designed to retain outlets. A retail outlet or distributorship which is lost
during maturity is unlikely to be easily regained at a later stage. To this
end, the major thrust of promotional effort may move from the consumer
to the distributor.
Price war should be avoided where possible, because the usual result
of initiating price cuts is to reduce revenue for all market participants. The
aim of price cutting should be to increase purchases sufficiently to offset
any revenue loss.
4. Decline Stage: While the shape of the PLC curve is theoretical and
should never be regarded as inevitable, persistently falling sales signify the
decline stage of the product. Market intelligence should be able to identify
16
the cause of this phenomenon. Consumer preferences may have changed
or innovative product may have displaced the existing product.
•
Sales falling continually for the total period
•
Intensification of price cutting
•
Producers deciding to abandon the market
As stated earlier, the decision to abandon a product poses problems
for the firm and is often not made early enough. On the other hand, it may
be worth extending the product’s life well into decline while the number of
competitors is falling.
While continuing in the market place” management’s attention is
likely to move from active marketing to very strict cost control. Cost control
and cost reduction is, of course, always an important element of
management activity, but during decline this may be the only method of
maintaining profitability.
6.3.2 The Product Life-Cycle as a Management Tool
The key to the successful use of the PLC concept is the ability to
identify accurately the transition from one stage to another. This requires
the company to be highly marketing-oriented and marketing-motivated,
making extensive use of relatively sophisticated marketing research and
marketing intelligence techniques. Once such a situation is feasible,
management has the basic framework for a long term strategic-planning
tool. In particular, use of the PLC provides two valuable benefits.
1.
A
predictable
course
of
product
development
for
which
appropriate strategies can be planned and budgeted.
2.
The scope to plan beyond the life of the existing product.
An important point about the product life cycle is that although every
product goes through various stages in the cycle, the length of various
stages varies from product to product. Mass consumption products which
17
are repeatedly purchased time and again generally have much longer
periods of growth and maturity than durable consumption goods. For
example, toothpaste has been in the market since a long time and will
probably remain there during the foreseeable future, whereas du-rable
goods like radios have been replaced by television and transistors to a great
extent. Secondly, a firm may, through effective product strategy, prolong
the growth and maturity stages in the life cycle of its products. This can be
done in various ways: (i) by modifying the product; (ii) by encouraging the
frequency of use of the product; (Hi) by cultivating a new market for it; and
(iv) by finding new users in the existing market. Stimulating new uses and
new users and product modification to increase sales is called product relaunch.
One of the major strategies for extending the growth and maturity
stages of a product is to modify it. Product modification may be aimed at
improving its functional utility, quality, style, etc.
Functional modification of a product involves improving its efficiency,
reducing its cost, funding its new applications, adding safety features,
increasing ease of handling, etc. For example, redesigning of sofas into
sofas convertible into beds gave a tremendous boost to their sales in cities
like Bombay where lots of people have only a limited living space available
to them. It may be emphasized that such product modification should fill a
real customer need and be so perceived by him. The real problem with
functional modification is that it may add to the cost of production, and
consequent increase in price may have an adverse effect on its sales.
Moreover, functional modification made by one firm, if successful, is going
to be copied soon by its competi-tors, and the innovator may soon lose the
initial competitive edge over them. Nevertheless, expansion in the primary
demand of the modi-fied product is going to benefit it if it can maintain or
increase its market share.
18
Many companies seek to extend the growth and maturity stages of
their products by making changes in their quality. This change in quality
may affect its durability, performance, operational cost, operation time, etc.
Quality may be improved or reduced as part of product modification
strategy. Negative change in quality may be made when it is intended to
position the product in the lower income group mar-ket by reducing its
price. On the other hand, improvement in quality is aimed at holding its
present customers as well as to attract the existing customers of a
competing superior brand.
Style changes play an important role in expanding the market of a
product. This product strategy has been most successfully followed by the
automobile makers in the U.S., where annual models of cars have become
an accepted part of the automobile market. In India, style changes in
products are most common in textiles and shoes. Many other products
such as fans, transistors, refrigerators, furniture, etc., have undergone so
much style modification during the last one decade or so that it is hard to
conceive what will be the style at the end of the next decade.
Sometimes a firm may seek to expand its market just by creating an
illusion of product modification without making any significant change in
the product itself. This is often done by making changes in packag-ing and
advertising appeal. Manufacturers of some pain relievers like Aspro and
Anacin are claiming better product effectiveness even though they have
made hardly any significant chemical improvements in their products.
6.4 PRODUCT MIX
The first task of a marketing manager is to answer the question,
“What products are we going to sell”? Since a marketing-oriented company
sells bundles of customers’ satisfactions, and not merely physical products,
the strategic task requires determination of satisfactions which the
company proposes to sell to customers. This requires consideration of not
19
only the functional aspects of the product but also its features, design,
colour, style, price, distribution channels, after-sales services, etc.
A related product strategy decision involves the consideration of the
depth and breadth of the product line. For example, the marketing manager
of a fan manufacturing company has to decide whether he should sell all
kinds of fans including table, ceiling and pedestal fans, of all standard sizes,
and in various price ranges to suit the pocket of customers of all income
groups. He may choose to market a limited product line or a full product
line.
Many companies produce a number of product lines now-a-days. For
example, the CIBA Geigy Co. produces pharmaceuticals and toothpaste.
The breadth of the product line like its depth depends on a company’s
resources, objectives and plans for future expansion and growth. A
company may diversify by broadening its product line in related products
or unrelated products or both in related as well as unrelated products. In
the above example of the CIBA-Geigy, the company has diversified in
unrelated products. This is called scramble diversification. On the other
hand, Bata Shoe Company has diversified in related products by marketing
socks, boot polish, etc. This is called related product diversification.
In certain situations, a company may adopt the strategy of slimming
or contracting the product mix. It may do so by abandoning a product line,
or reducing the variety of models in a product line, called product line
simplification. In the U.S.A., a trend of trimming the product line was
witnessed in the 1970s. Many companies like Xerox, Radio Corporation of
America, General Electric, etc., dropped certain product lines altogether
and also thinned certain fat product lines. The objective of trimming the
product line is to abandon the low-sales volume and lowprofit products and
concentrate on a limited number of high-profit products.
20
Product-Mix Defined
“A product mix (also called product assortment) is the set of all
products and items that a particular seller offers for sale”.
It is the set of all product lines and items that a particular company
offers to buyers. The width of a product mix refers to how many different
product lines a company carries. For example, Proctor & Gamble’s (P & G)
product mix in India consists of four lines such as detergents, bar soaps,
personal hygiene products and disposable diapers.
The depth of a product mix refers to how many variants of each
product are offered in the line, e.g. Colgate-Palmolive’s Halo shampoo
comes in three formulations and three sizes and hence has a product mix
depth of nine. This kind of assortment is popularly referred as Stock
Keeping Units (SKUs).
The consistency of a product mix refers to how closely related the
various product lines are intend use. Hence, Nestle’s product lines are
consistent in the sense that they are all food products, P & G has an
unrelated product mix.
The width, depth and consistency of product mix enables a company
to
define
its
product
portfolio,
appeal
to
different
consumer
needs/segments and encourage one-stop buying. A broad width or deep
mix goes to satisfy the needs of several consumer groups and maximize
shelf-space and sustain dealer support.
A consistent mix is generally easier to manage than diversified mix.
It allows the marketer to concentrate on its core competence, build or create
a strong image among consumers and trade channels. However, excessive
consistency may leave the marketer to a narrow range of business.
Example, Indian Tobacco Company (ITC) being in the tobacco business, is
vulnerable to environmental threats, the vagaries of business or sales
21
fluctuations if consumer groups are too sharply defined. On the other
extreme, companies like Philips, Videocon, BPL, etc. may enjoy the benefit
of a diversified product mix. The following discussion will highlight the
various considerations taken in deciding the product line.
6.5 PRODUCT LINE
It is a group of products that is closely related because they perform
a similar function, targeted at the same customer groups, and marketed
through the same channels. The important attributes associated with
product line are discussed below:
1.
Line stretching: Decisions pertaining to line stretching are
taken whenever the marketer feels he can increase his profits by either
adding or dropping items from the line. It can be upwards, downwards or
both ways.
Downward stretch takes place when the company finds that its
offerings are at the high price end of the market and then stretch their line
downwards. For example, P & G’s Ariel detergent began at premium end
and then the down market Ariel bar was introduced to tap the lower
segment.
Conversely, upward stretch occurs when a company enters the upper
end through a line extension. The reasons for this may be a higher growth
rate, better margins or simply a wish to be a full line marketer. An example
of a successful upward stretch would be that of Lifebuoy, which started
from hygienic bath soap for the masses to a premium quality liquid hand
wash for the higher strata of society. Throughout this stretch the brand had
used hygiene as is core benefit, so that there was no dissonance in the
minds of consumers.
22
2.
Line filling: A product line can also be lengthened by adding
more items within the present product range. There are several reasons for
line filling.
•
Reaching for incremental profits.
•
Trying to satisfy dealers who complain about lost sales because
of missing items on the line.
•
Trying to utilize excess capacity.
•
Trying to offer a full line of the product.
•
Trying to plug holes in the positioning map.
The launch of Cinthol, in different variants is an example of line
filling. Today Cinthol is a lime-soap with yellow packaging and a cologne
variation with blue wrapping apart from the initial Cinthol fresh. There is
also a Cinthol International, packed in a red pack with a picture of
mountains depicting freshness.
The company needs to differentiate each item in the consumer’s
mind. For this, each item must possess a difference which sets it apart from
the others.
3.
Line modernization: Even when the product line length is
adequate, the line might need to be modernized. The issue is whether to
overhaul the line completely or one at a time. A piecemeal approach allows
the company to see how customers and dealers react to the new style.
Piecemeal modernization is less of a drain on the company’s cash flow. A
major disadvantage of piecemeal modernization is that it allows competitors
to see changes and start redesigning their own line.
In the rapidly changing market, product modernization is carried out
continuously. Because competitors are constantly upgrading their options,
each company must redesign their own offering. A company would like to
upgrade customers to higher-valued, higher-priced items. A major issue is
the timing of the product line improvements so that they do not happen too
23
early and damage the sales of their current product line, or come out too
late so that the competitors can establish a strong foothold.
4.
Line featuring: In the case of durable products, marketers at
times select one or a few items to “feature”. The idea is to attract consumers
into the showrooms and then try to get them exposed to other models. At
times, the marketer will feature a high end item to lend prestige to the
product line. These products act as “flagships” to enhance the whole line.
Sometimes a company finds one end of its line selling well and the other
poorly. The company may try to boost the demand for the slow-moving
items, especially if they are produced in a factory that is lying idle due to
the lack of demand.
6.5.1 Managing Line Extensions
There are several factors which can explain why so many companies
have pursued line extensions as their marketing strategies. These are being
discussed as under:
1.
Customer segmentation: Managers perceive line extensions
as a low-cost, low-risk way to meet the needs of various customer segments
and by using more sophisticated and lower-cost market research and direct
marketing techniques, they can identify and target finer segments more
effectively than ever before. In addition, the quality of audience profile
information for television, radio and print media has improved; managers
can now translate complex segmentation schemes into effective advertising
plans.
2.
Consumer desires: Consumers are switching brands and
trying products they have never used before. Line extensions try to satisfy
the desire for “something different” by providing a wide variety of products
under a single umbrella. Such extensions, companies hope, fulfil customer
24
desires while keeping them loyal to the brand franchise. The Gujarat Milk
Marketing Federation launched a host of milk-based products under the
brand name Amul. Similarly, SmithKline Beecham made an entry into the
faster growing brown beverages segment with its Chocolate Horlicks brand
to counter the established Cadbury’s brand Bournvita.
Line extensions can help a brand increase its share of shelf space,
thus gaining higher visibility and attracting consumer attention. When
marketers coordinate the packaging and labelling across all items in a
brand line, they can achieve an attention-getting billboard effect on the
store shelf or the display stand and thus leverage the brand’s equity.
However, building enough volumes to offset the additional costs required
for such extension is also necessary.
3.
Pricing breadth: Marketers often extend the line on superior
quality platform and set higher prices for the new offering than their core
items. In markets subject to slow volume growth, marketers can increase
unit profitability by attracting current customers move up to the “premium”
products. In this way a marketer also lends “prestige” to its product-line.
Similarly, some line extensions are priced lower than the lead
product. For example, American Express offers its Optima card for a lower
annual fee than its standard card. Extensions give marketers the
opportunity to offer a broader range of price-points in order to capture a
wider audience, and thereby serve as “volume builders”.
4.
Excess capacity: On some occasions companies added new
product lines to make use of their excess capacity or to improve efficiency
and the quality of existing products. In fact, excess capacity encourages the
introduction of line extension that requires only minor adaptations to
current products.
25
5.
Short-term gain: Line extensions offer the most inexpensive
and least imaginative way to increase sales quickly. The development time
and costs of line extensions are far more predictable than they are for
altogether new products. In fact, few brand managers are willing to spend
the time or assume the career risk of introducing new products in this
crossed market.
6.
Competitive intensity: Mindful of the link between market
share and profitability, managers often see extensions as a short-term
competitive device that increases a brand’s control over limited retail shelf
space and, if overall demand for the category can be expanded, also
increases the space available to the entire category.
7.
Trade pressure: The proliferation of retail channels for
consumer products compels marketers to offer broad and varied product
lines. Retailers object to the proliferation of marginally differentiated and
“me too” line extensions of additional stock-keeping units (SKU). They,
instead, demand special package sizes to meet their specific customer
demand (for example, bulk packages or multi-packs of low-price variety) or
derivative models that impede comparison shopping by consumers.
8.
Energizing a brand: A line extension can be an effective way
to make a brand more relevant, interesting, and visible. In doing so, it can
create a basis for differentiation, build the audience for the advertising of
an old brand (though the brand may be healthy), and stimulate sales. This
would give new as well as old customers sufficient reason to buy the brand.
9.
Exploitation of variety fulfilment: A brand may be stretched
across multiple product categories to take advantage of a common and
important consumer benefit existing in both, the products and the
consumer perceptions. This is the common benefit of exploitation strategy
which ensures that sales in the other categories do not affect the parent
26
brand. Line extensions can also increase a brand’s consumer share of
requirements within a given product category.
10.
Expanding a brand’s core promise to new users: A brand
may have a strong image that promotes loyalty and exclusiveness. A line
extension can extend that promise. In fact, line extensions can perform the
role of continually improving the core brand. Intelligent line extensions may
be used as means to attract users who buy multiple brands.
11.
Managing true innovation: Line extension is an effective way
to foster and manage true innovation, thereby enhancing the value
proposition, expanding the usage contexts, and blocking competitive entry.
12.
Blocking or inhibiting competitors: Although niche markets
may represent marginal businesses, they may strategically represent
important footholds for competitors. Line extensions have the potential of
inhibiting or neutralizing moves by competitor. Failure to see this aspect
may result in adverse consequences for market leaders, as can be seen from
what happened to companies like Tomco, Calcutta Chemicals, etc. who
permitted new companies to gain a toehold in their respective industries.
13.
Managing a dynamic environment: Line extensions provide
a way to survive in an environment full of ambiguities and transitory signals
and forces. If the company does not extend line it may face the risk that if
a segment is created corresponding to the “new” product, such a segment
may be a precursor to a larger trend that, if ignored, might generate a
strategically altered landscape with a first-mover competitor holding a
considerable advantage.
14.
Testing ground for national launch: Product line extensions
can also be effective ways to test-market product improvements and at the
same time enter emerging segments. Thus, logic seems to be on the rise for
27
any new launch to assess the pulse of the market in a competitive
environment.
6.6 SUMMARY
A product is “a set of tangible and intangible attributes, including
packaging, colour, price, manufacturer’s prestige, retailer’s prestige,
manufacturer’s and retailer’s services, which the buyer may accept as
offering satisfaction of wants or needs. There are five levels of product. The
most fundamental is the core benefit or service followed by a basic version
of the product. At the third level, the market prepares an expected product,
a set of attributes and conditions buyers normally expect when they
purchase this product. At the fourth level, the marketer prepares an
augmented product that exceeds customers’ expectations. At the fifth level,
there is a potential product which encompasses all the possible
augmentations and transformations where the product might undergo in
the future.
There can be two broader classification of the product i.e. consumer
goods and industrial goods. Consumer goods include convenience
products, shopping goods, speciality goods, and unsought goods. In
industrial goods installations, components, accessories, supplies and raw
materials are included. As far as product life cycle is concerned, it has four
stages namely introduction, growth, maturity and decline. The value of this
concept is that once the stage is identified marketer can adept his strategies
accordingly. When marketers take the decision related to products they
have to consider so many decisions like product mix, product line,
packaging, and branding, etc.
6.7 KEYWORDS
Durable good: A tangible, physical item that can be used over an
extended period.
28
Non durable good: A tangible, physical item that is quickly
consumed and lasts for a shorter span.
Convenience product: A relatively inexpensive, regularly purchased
consumer product bought without much though and with minimum effort.
Shopping product: A product for which consumers feel the need to
make comparisons and seek out more information.
Speciality product: A product that is not bought regularly and
frequently, is likely to be more expensive, and is generally purchased with
great care.
Industrial product: A product or service that is used to produce
other product for further use.
Product line: A group of products that are closely related and sold
through same kind of outlets.
6.8 SELF ASSESSMENT QUESTIONS
1.
Describe each of the main stages of the product life cycle.
2.
What do you understand by product line? Discuss the
attributes associated with product line management.
3.
Write a detailed note on the product mix.
6.9 REFERENCES/SUGGESTED READINGS
1.
Marketing Management, Analysis, Planning and Control By
Philip Kotler, Prentice Hall of India, New Delhi.
2.
Marketing Management By Rajan Saxena, Tata McGraw Hill
Publishing Company Ltd., New Delhi.
29
3.
Marketing
Management-
Planning,
Implementation
and
Control, The Indian Context By Ramaswamy V.S. and
Namakumari S., Macmillan India Ltd., New Delhi.
4.
Product Management in India by Majumdar. Prentice Hall of
India, New Delhi.
5.
Organization and Management by R.D. Aggarwal, Tata McGraw
Hill Publishing Company Ltd., New Delhi.
30
LESSON-7 PRODUCT DECISIONS: NEW PRODUCT
DEVELOPMENT
STRUCTURE
7.0
Objective
7.1
Introduction
7.2
Improving Existing Products
7.3
Classification of New Products
7.4
Stages in New Product Development
7.5
New product failure
7.5.1 How to Avert New Product Failures
7.5.2 The Firm Must be Well Prepared for Meeting Retaliation
From Strong Competitors
7.6
Product elimination
7.7
Summary
7.8
Keywords
7.9
Self assessment questions
7.10 References/Suggested Readings
7.0 OBJECTIVE
The present chapter discusses the subject of new product
development in detail. A number of aspects relating to new product
development, such as, significance of new product development, the typical
stages in the new product development, the problems in new product
development, and new product failures have been examined in this
chapter.
1
7.1 INTRODUCTION
To compete effectively and achieve their goals, organisations must be
able to adjust their product mixes in response to changes in customers
and customers’ needs. A firm often has to introduce new products, modify
existing products, or eliminate products that were successful perhaps only
a few years ago. To provide products that satisfy target markets and
achieve the organisation’s objective, a marketer must develop, alter, and
maintain an effect product mix. An organization’s product mix may need
several types of adjustments. Because customers’ attitude and product
preferences changes over time, their desire for certain products may wane.
In some cases a company needs to alter its product mix for
competitive reasons. A marketer may have to delete a product from the mix
because a competitor dominates the market for that product. Similarly, a
firm may have to introduce a new product or modify an existing one, to
compete more effectively. A marketer may expand a firm’s product mix to
take advantage of excess marketing and production capacity.
Regardless of the reasons for altering a product mix, the product mix
must be managed. In strategic market planning, many marketers rely on
the portfolio approach for managing the product mix. The product portfolio
approach tries to create specific marketing strategies to achieve a balanced
mix of products that will bring maximum profits in the long run. This
chapter examines several ways to improve an organisation’s product mix,
including managing existing products, developing new products from idea
generation to commercialization, and eliminating weak products from the
product mix.
2
7.2 IMPROVING EXISTING PRODUCTS
An organisation can benefit by capitalizing on its existing products.
By assessing the composition of the current product mix, a marketer can
identify weaknesses and gaps. This analysis can then lead to improvement
of a product mix through line extension and through product modification.
Life Extensions
A line extension is the development of a product that is closely
related to one or more products in the existing product line but it designed
specifically to meet somewhat different needs of customers. For example,
the maker of comet cleanser has extended this line to include Liquid Comet
and Comet Gel. Many of the so-called new products introduced each year
by organizations are in fact line extensions. Line extensions are more
common than new products because they are a less expensive, lower risk
alternative for increasing sales. A line extension may focus on a different
market segment or may be an attempt to increase sales within the same
market segment by more precisely satisfying the needs of people in that
segment.
Product Modifications
Product modification means changing one or more characteristics of
a firm’s product. A product modification differs from a line extension in
that the original product that is modified does not remain in the line. For
example, automakers use product modifications annually when they create
new models of the same brand. Once the new models are introduced, the
manufacturers stop to producing last year’s model. Like line extensions,
however, product modifications entail less risk than developing new
products.
Product modification can indeed improve a firm’s product mix, but
only under the following conditions. First, the product must be modifiable.
3
Second, customers must be able to perceive that a modification has been
made. Third, the modification should make the product more consistent
with customer’s desires so that it provides greater satisfaction. There are
three major ways to modify products: quality modifications, functional
modifications, and aesthetic modifications.
Quality Modifications
Quality modifications “are changes that relate to a product’s
dependability and durability. Usually the changes are executed by altering
the materials or the production process. Increasing the quality of a product
may give a firm an advantage over competing brands. However, higher
quality may require the use of more expensive components and processes,
thus forcing the organisation to cut costs in other areas. Some firms, such
as Caterpillar, are finding ways to both increase quality and reduce costs.
Functional Modifications
Changes
that
affect
a
product’s
versatility,
effectiveness,
convenience, or safety are called functional modifications; they usually
require that the product be redesigned. Typical product categories that
have undergone considerable functional modifications include office and
farm equipment, appliances, and cleaning products. Procter and Gamble,
for example, modified Tide by adding bleach, which improved the
detergent’s effectiveness. Functional modifications can make a product
useful to more people and thus enlarge its market. This type of change can
place a product in a favourable competitive position by providing benefits
that competing brands do not offer.
Aesthetic Modifications
Aesthetic modifications change the sensory appeal of a product by
altering its taste, texture, sound, smell or appearance. A buyer making a
4
purchase decision is swayed by how a product looks, smells, tastes, feels
or sounds. Thus, an aesthetic modification may strongly affect purchase.
For years automobile makers have relied on aesthetic modifications.
7.3 CLASSIFICATION OF NEW PRODUCTS
Before we proceed with the subject of new product development it is
essential to understand properly the term- new product. New Products can
be broadly classified into two groups: (i) new products arising out of
technological innovations, and (ii) new products arising out of marketing
oriented modifications. The first group involves Innovations leading to
intrinsically new products with a new functional utility behind them. The
second group involves mere marketing oriented innovations in existing
products; it gives rise to new versions of the existing products; the newness
may be due to a change in the colour of the product, its design, the addition
of a new feature, a change of package or a change of brand name. The
newness may also be due to a repositioning of the existing product or
finding a new use for the existing product or offering the existing product
with new sales appeal to a new market segment. This subject has been
already dealt within the preceding section on improving existing product.
In this chapter, we shall confine our discussions to the intrinsically new
product.
7.4 STAGES IN NEW PRODUCT DEVELOPMENT
Let us now consider the various stages a firm has to pass through for
launching a new product in the market.
New product development in respect of altogether: New products, goes
through several important stages as shown below:
•
Product Strategy Development
•
Generating New Product Ideas Idea Screening
•
Concept Testing
5
•
Business Analysis and Market Analysis Product Development
•
Test Marketing
•
Commercialisation
Each of these stages involves considerable study and analysis and
at each stage, a management decision is called for before proceeding to the
next stage.
Product Strategy Development
Developing an explicit new product strategy is a new but widely used
concept. The companies formally treat strategy as the first step in new
product planning. The strategy links product development to corporate
strategic direction. Based on corporate objectives and strategy, the
corporate role for new products is determined, the external environment is
scrutinized to identify emerging product threats and opportunities,
industries are evaluated to determine the growth potential of existing
markets, previous new product experience in various markets are
considered, internal capabilities are evaluated to identify relevant company
strengths and weaknesses, the existing management style is weighed, and
the position of existing products in the product life cycles considered. A
new product strategy provides a set of strategic roles that, in turn, help
identify the markets for which new product ideas will be developed.
Developing a new product strategy, the first step, provides a focus for the
second, idea generation step in that the ideas generated are intended to
meet strategic objectives. The screening criteria used (in step 3) are also
tied to strategic objectives.
Idea Generation
Businesses and other organisations seek product ideas that will help
them achieve their objectives. This activity is idea generation. The fact- only
few ideas are good enough to be commercially successful, underscores the
6
difficulty of the task. Although some organizations get their ideas almost
by chance, firms that are trying to manage their product mixes effectively
usually develop systematic approaches for generating new product ideas.
At the heart of innovation is a purposeful, focused effort to identify new
ways to serve a market. Unexpected occurrence, incongruities, new needs,
industry and market changes, and demographic changes all may indicate
new opportunities.
New product ideas can come from several sources. They may come
from internal sources- marketing managers, researchers, sales personnel,
engineers, or other organisational personnel. Brainstorming and incentives
or rewards for good ideas are typical intrafirm devices for stimulating the
development of ideas. For example, the idea for 3 M Postit adhesive-backed
notes came from an employee. As a church choir member, he used slips of
paper for marking songs in his hymnal. Because the pieces of paper fell
out, he suggested developing an adhesive-backed note. New product ideas
may also arise from sources outside the firm- customers, competitors,
advertising agencies, management consultants, and private research
organisations. Asking customers that they want from products and
organizations has helped many firms to become successful and to remain
competitive.
Direct observation of competitors’ products, customers’ evaluations
of their product features, and the grapevine of suppliers and others who
serve competitors often contributes ideas. Ethical and legal issues can
arise from clandestine activities, yet such activities sometimes occur.
Disassembly and intensive analysis of competitors’ product is common.
Hiring away competitors’ employee is another strategy, sometimes
challenged in the courts.
Inventors
and
other
“creators”
represent
a
key
source
of
technological innovation and product ideas from outside the company.
7
Major companies are constantly approached with new product ideas that
can be acquired or licensed for production or distribution. To make sure
that ideas received in this way are appropriately screened, not just quickly
rejected or lost, it is essential that those in the company most likely to be
contacted by creators be identified and trained.
Employees: All employees must understand how to make their ideas
known and be encouraged to do so. One way to accomplish this is to offer
employees rewards for ideas that are later deemed marketable. Employees
often have an understanding and interest in company products that make
them astute judges of ways to improve them.
Another approach is to use brainstorming sessions in which small
groups of customers (and others) toss out new product ideas. Such
sessions may last one or two hours and are largely unstructured and
freewheeling. Leadership keeps the interchange moving and the discussion
on the desired track. A brainstorming session may generate as many as 75
to 100 new ideas. Since the objective is to have the participants advance
as many ideas as possible, no criticism or evaluation of the ideas presented
is allowed. The ideas advanced are screened later.
Focus group interviewing is a technique similar to brainstorming.
The sessions are freewheeling, but they often go beyond idea generation to
include evaluation and discussion of related issues.
Idea Screening
In the process of screening, the ideas with the greatest potential are
selected for further review. During screening, product ideas are analysed
to determine whether they match the organisation’s objectives and
resources. If a product idea results in a product that is similar to the firm’s
8
existing products, marketers must assess the degree to which the new
product could cannibalize the sales of current products. The company’s
overall abilities to produce and market the product are also analysed.
Other aspects of an idea that should be weighed are the nature and wants
of buyers and possible environmental changes. At times a checklist of newproduct requirements is used when making screening decisions. It
encourages evaluators to be systematic and so reduces the chances of their
overlooking some pertinent fact. Compared with other phases, the largest
number of new-product ideas is rejected during the screening phase.
Concept Testing
To evaluate ideas properly, it may be necessary to test product
concepts. Concept testing is a phase in which a small sample of potential
buyers is presented with a product idea through a written or oral
description (and perhaps a few drawings) to determine their attitudes and
initial buying intentions regarding the product. For a single product idea,
an organization can test one or several concepts of the same product.
Concept testing is a low cost procedure that lets an organisation determine
customers’ initial reactions to a product idea before it invests considerable
resources in research and development. The results of concept testing can
be used by product development personnel to better understand which
product attributes and benefits are most important to potential customers:
Notice that the concept is briefly described; then a series of questions
is presented. The questions asked vary considerably depending on the type
of product being tested. The typical questions are these: IN general, do you
find this proposed product attractive? Which benefits are especially
attractive to you? Which features are of little or no interest to you? Do you
feel that this proposed product would work better for you than the product
that you currently use? Compared with your current product, what are the
primary advantages of the proposed product? If this product were available
9
at an appropriate price, would you buy it? How often would you buy this
product? How could this proposed product be improved?
Product Description
(Concept Test for a Tick and Flea Control Product)
An insecticide company is considering the development and introduction
of a new tick and flea control product for pets. This product would consist
of insecticide and a liquid dispensing brush for applying the insecticide to
dogs and cats. The insecticide is in a cartridge that is installed in the
handle of the brush. The insecticide is dispensed through the tips of the
bristles when they touch the pet’s skin (which is where most ticks and fleas
are found). The actual dispensing works very much like a felt-tip pen. Only
a small amount of insecticide actually is dispensed on the pet because of
this unique dispensing feature. Thus the amount of insecticide that is
placed on your pet is minimal compared to conventional methods of
applying a tick and flea control product. One application of insecticide will
keep your pet free from ticks and fleas for fourteen days.
Please answer the following questions:
1. In general, how do you feel about using this type of product on your
pet?
2.
What are the major advantage of this product compared with the
existing product that you are currently using to control ticks and
fleas on your pet?
3.
What characteristics of this product do you especially like?
4.
What suggestions do you have for improving this product?
5.
If it is available at an appropriate price, how likely are you to buy this
product?
Very likely
Semi-likely
10
Not likely
6.
Assuming that a single purchase would provide 30 applications for
an average-size dog or 48 applications for an average-size cat,
approximately how much would you pay for this product?
Business Analysis and Market Share Analysis
This stage is crucial in the total process of new product development
because several vital decisions regarding the project are taken based on
the analysis done at this· stage. This stage will decide whether from the
financial and marketing point of view, the project is worth proceeding with.
Investment and profitability analyses of the project under different
assumptions are made at this stage. The project’s overall impacts on the
corporation’s financial position with and without the new product are
estimated and compared. The financial estimates would be reliable only if
they are based on a fairly accurate demand forecast and related market
factors. The marketing experts by now should have undertaken detailed
exercises on the marketability of the product. They have to come up with
information on the following aspects, in particular:
•
Estimate of demand for the proposed product.
•
A fairly reliable demand estimates is essential for evaluating the
viability of the proposed project. Demand estimation for
intrinsically new products is being discussed in a separate
section. If the proposed product is only a ‘me-too’ product,
the demand for the product category has to be estimated and
the likely share the proposed product can take, has to be
evaluated.
•
Seasonal patterns in consumption, if any.
•
Competition.
•
Major competitors, their market shares, the dominant market
segments held by them.
•
Special market features affecting demand.
•
Price elasticity of demand.
11
•
Volume-cost profit analysis at different feasible levels. The
nature of channel required the nature of channels available,
comparative costs/advantages of alternative channel types.
•
The marketing organisation required for marketing the
product- whether the existing marketing organisation can take
care of the product or whether a new organisation setup is
required. If so, what would it cost?
Only when information on the above aspects is complete, meaningful
estimates of overall profitability of the project can be made. And it is based
on the overall profitability picture that the corporation decides further.
Product Development
The product ideas that pass the screening and business analysis
stages are not usually “concrete” enough for extensive testing of customer
acceptance. An idea must be developed into a functioning product. Product
development is often a scientific and engineering task, leading to the design
and building of prototype working models. Once a prototype exists,
functional testing may take place. For technical products such as sound
speakers or robots, this may be a complex and lengthy task. Government
testing and approvals may also be required for such products as new
cancer drugs or birth control devices. Alternative designs may vary the
product’s safety and its cost. Relatively simple products, as well as many
services, may be developed and tested quickly and inexpensively. Others
take years to develop and test. But in any case, marketing plays a valuable
role. To determine which design is best, information on customer
preferences is often needed in addition to comparative costs. Customer
preferences can be obtained informally through personal contact, as when
a product is developed for a few industrial customers. Or marketing
research may sample customers’ preferences when the target markets
comprise many, widely dispersed customers.
12
Consumer preference testing may also be used at this stage to help
choose features to build into a particular product. Suppose that a firm has
screened a few food product and is now trying to determine specific
ingredients to create desired product characteristics and benefits. A key
attribute is sweetness. Yet development personnel are unsure of the degree
of sweetness to build into the product. Perspective consumers can be
recruited and asked to taste samples that differ only in the level of sugar.
Consumers choose the preferred version in a paired-comparison test, after
testing and comparing several pairs of products. Data from the choices
made by all the consumers determine the distribution of preferences over
the various levels of sweetness being tested. Sweetness level A, which
corresponds to a particular sugar content, is preferred by a majority of the
consumers. Yet choosing this level could result in falling victim to the
majority fallacy. If there are competitive products with a sweetness level at
or near A, then the best strategy might be to build in a lower or higher level
of sweetness. This would differentiate the product from its competitors and
possibly capture a larger share of a smaller market.
Interaction between marketing and product development personnel
is by Gillette’s experience with its roll-on antiperspirant, Dry Idea. From
consumer research, management learned that many people thought
rollons were wet when applied, forcing them to wait to get dressed.
Chemists at Gillette’s laboratory in Boston were told to develop a roll-on
that would not go on wet. Several formulations were tried by consumers
who judged the feel of each roll-on as it was applied as well as the roll-on’s
antiperspirant qualities. Then, one was selected.
The new product development stage also provides information on the
estimated costs of manufacturing, packaging and distributing the product.
Because the development stage is yet another decision point in the new
product decision process, the product idea may be dropped if building is
not technically feasible; if the product can only be built with substantial,
13
undesirable modifications; or if the costs of development or production are
prohibitive. Minnesota Mining and Manufacturing Company (3M) once
evaluated a new product concept involving the commercial farming of
oysters in a controlled situation. Eventually, 3 M rejected the idea because
a small scale test showed that it was not possible to cultivate enough
oysters to make the project financial attractive.
Designing Supporting Strategies: Once an idea has passed the
screening stage, work on the design and testing of supporting strategies
and tactics can begin, concurrently with product development. Planning
supporting strategies at this stage can significantly reduce the total lead
time between idea screening and product introduction.
In another application, a manufacturer of a new food-flavouring
product tried out alternative package designs on small samples of
consumers. Management learned that customers wanted to see the
product before making a buying decision. A package with a clear plastic
“window” was finally selected, so that customers could see the contents
without actually opening the package.
Small-scale tests of supporting strategies should not be confused
with marketing research intended to forecast sales. The results of
smallscale tests are too limited in scope to provide much help in estimating
demand, but they sound out consumer reaction to individual components
of marketing programs.
Test Marketing
During this stage, the product is actually tried out in selected market
segments. Only based on the results of test marketing will a marketer and
manufacturer usually launch large scale manufacture of the new product.
Test marketing is a form of risk control and ensures avoidance of costly
business errors. It is a controlled marketing experiment with minimum
possible cost and risk to decide on the soundness and feasibility of full14
fledged marketing of the product. If totally new products are introduced
into the market on a commercial scale without resorting to test marketing,
it may so come to light that the product was not the right one for the chosen
market. This may be too costly a mistake for the firm. Test marketing in
such a case may indicate that the sales prospect for the product is bound
to be poor; and the firm may opt to drop the new product idea and save
the investment. On the contrary, if the results received from the test
marketing are positive and encouraging, the firm may go ahead with the
commercial production and marketing of the new product.
Test marketing is an experiment that has to be carefully conducted.
Care is required in selecting the ‘test markets’ and ‘control markets’, in
monitoring the test and in analysing and interpreting the test results. In
many cases, test marketing is also a time consuming process; it has to be
carried out for long duration in order to obtain reliable and meaningful
indications. And if competitors get information regarding the test, it is
possible for them to ‘manipulate the test process and thereby make the
test results unreliable.
Test Marketing Technique Takes Roots in India
In India, test marketing as a marketing technique is becoming
popular in recent times. In the past, only big corporations like Hindustan
Lever and Tatas used to go in for test marketing. Now, more and more firms
with the help of advertising and marketing research agencies are going in
for test marketing before a new product is commercially launched. For
instance, TTK group test marketed Yammies, a snack food and Vazir
Sultan test marketed Charms cigarettes before launching full scale
marketing. Mc-Dowells test marketed Sprint in Bombay before going
national. Metropolitan test marketed their brand of shirts for a period of
six months in Bangalore before going in for full scale production and
marketing.
15
A decision must finally be made on whether or not deciding on to
introduce the new product into target markets. In commercialisation of a
product, all evaluations are brought to bear as management assesses the
degree to which the product and the supporting strategy can be expected
to succeed. If the decision is to go ahead, resources are committed to
implementing the new product strategy. Raw material and component
contracts must be made with suppliers; channels of distribution must be
selected; manufacturing facilities, equipment, and processes must be set
into operation; salespeople may need to be hired and trained; and so forth.
Typically, very large commitments of money and personnel are involved.
Because of the tremendous resource commitment required by new product
launching, a crucial decision concerns the time frame over which the
introduction will take place.
Crash Introduction (Commercialization)
A crash introduction is the full-scale commercialization of a new
product as quickly as possible. The resources needed to move into target
markets are immediately committed. In this way, competitors are given
little time to prepare their responses to the product. A crash program is
most often selected when competitors can counter quickly and maximum
lead time is needed to establish market position. A crash introduction
tends to maximise other risks because substantial resources are
committed quickly.
Rollout Introduction
For a rollout introduction, target markets are divided geographically
and initially the new product is introduced in only one or a few .areas. If
the new product is successful in these areas, the process continues until
all geographic target markets are being served. A rollout offers the
advantage of giving management time to monitor and adjust the new
product strategy before all resources are committed. This is not the same
16
as continuing the test market stage, because an introduction decision has
been made, much larger market areas are entered, and less elaborate
monitoring of performance is conducted. When the resources needed for a
crash program are not available, as is the case with smaller companies,
the rollout procedure may be the only feasible alternative.
Timing
Highly innovative products are often introduced before potential
customers are prepared to accept them. Introductions occur when their
time often fail. At the other extreme, delays or overlay slow rollouts can
help competitors gain a substantial advantage. There is often a window of
opportunity that gradually closes due to changing preferences, competitive
entries, and a changing environment. Most timing issues are specific to the
product market situation, so related analysis is essential.
Product Adoption Process
The acceptance of new products- especially new to the world
products -usually doesn’t happen overnight and it can take a very long
time. People are sometimes cautious or even sceptical about adopting new
products, as indicated by some of the remarks quoted in Table. Customers
who eventually accept a new product do so through an adoption process.
The following stages of the product adoption processes are generally
recognized as those that buyers go through in accepting a product.
1.
Awareness: The buyer becomes aware of the product.
2.
Interest: The buyer seeks information and is receptive to
learning about the product.
3.
Evaluation: The buyer considers the product’s benefits and
determines whether to try it.
4.
Trial: The buyer examines, tests, or tries the product to
determine its usefulness relative to his or her needs.
17
5.
Adoption. The buyer purchases the product and can be
expected to use it when the need for this general type of product
arises again.
In the first stage, when individuals become aware that the product
exists, they have little information about it and are not concerned about
obtaining more. For example, one might be aware that Polaroid offers a
talking camera that has built-in recorded comic messages to evoke smiles,
but have no plans to gather more information about it. Consumers enter
the interest stage when they are motivated to get information about the
product’s features, uses, advantages, disadvantages, price, or location.
During the evaluation stage, individuals consider whether the product will
satisfy certain criteria that are crucial for meeting their specific needs. In
the trial stage, they use or experience the product for the first time,
possibly by purchasing a small quantity, by taking advantage of a free
sample or demonstration, or by borrowing the product from someone.
Supermarkets, for instance, frequently offer special promotions to
encourage consumers to taste products. During this stage potential
adopters determine the usefulness of the product under the specific
conditions for which they need it.
TABLE 7.2: MOST NEW IDEAS HAVE THEIR SCEPTICS
18
“I think there is a world market for may be five computers”
- Thomas Waston, Chairman of IMB,
1943 “This telephone’ has too many shortcomings to be seriously
consideredas a means of communication. The device is inherently of no
value to us”.
- Western Union internal memo, 1876
“The wireless music box has no imaginable commercial value. Who would
pay for a message sent to nobody in particular?
- David Sarnoffs associates in response
to his urgings for investment in the radio in the 1920s “Who the hell wants
to hear actors talk?”
- H.M. Warner, Warmer Brothers, 1927
“A cookie store is bad idea. Besides, the market research reports say
America likes crispy cookies, not soft and chewy cookies like you make”.
- Banker’s response to Debbie Field’s
Idea of starting
Mrs., Fields’ Cookies
“We don’t like their sound, and guitar music is on the way out”.
- Decca Recording Co. rejecting the
Beatles, 1962
Individuals move into the adoption stage by choosing the specific
product when they need a product of that general type. However, because
a person enters the adoption process does not mean that she or he will
eventually adopt the new product. Rejection may occur at any stage,
including adoption. Both product adoption and product rejection can be
temporary or permanent.
This
adoption
model
has
several
implications
for
the
commercialisation phase. First, the company must promote the product to
create widespread awareness of its existence and its benefits: Samples or
simulated trials should be arranged to help buyers make initial purchase
decisions. At the same time, marketers should emphasize quality control
19
and provide solid guarantees to reinforce buyer opinion during the
evaluation stage. Finally, production and physical distribution must be
linked to patterns of adoption and repeat purchases.
When an organization introduces a new product, neither people all
begin the adoption process at the same time, nor do they move through the
process at the same speed. Of those who eventually adopt the product,
some enter the adoption process rather quickly, whereas others start
considerably later. For most products, too, there is a group of non adopters
who never begin the process.
Depending on the length of time it takes them to adopt a new
product, people can be divided into five major adopter categories:
innovators, early adopters, early majority, late majority, and laggards.
Figure 7.1 illustrates each adopter category and the percentage of total
adopters that it typically represents. Innovators are the first to adopt a new
product; they enjoy trying new products and tend to be venturesome. Early
adopters choose new products carefully and are viewed as “the people to
check with” by persons in the remaining adopter categories. Persons in the
early majority adopt just prior to the average person; they are deliberate
and cautious in trying new products. Late majority people, who are quite
sceptical of new products, eventually adopt new products because of
economic necessity or social pressure. Laggards, the last to adopt a new
product, are oriented toward the past.
They are suspicious of new products, and when they finally adopt the
innovation, it may already have been replaced by a new product.
20
Fig. 7.1: Distribution of Product Adopter Categories
Source: Reprinted with permission of The Free Press, a division of
Simon & Schuster, from Diffusion of Innovations, Fourth Edition by
Everett M. Roger.
7.5 NEW PRODUCT FAILURE
•
New product development is a highly expensive; time
consuming and risk laden affair. Only those organisations
that have the capacity to absorb the shocks arising out of all
these factors can really go ahead with the task of new product
development. Such organisations invest heavily in research
and development and they often have several new product
ideas in the queue, each in different stages of formulation.
While such firms remain leaders in their chosen markets, with
all the attendant advantages of being a leader, the· vast
majority of the companies prefer to be followers entering with
similar products after the pioneer establishes his new product.
Majority of the firms shy away from the task of new product
development for the following reasons.
•
New products suffer from a high attrition rate. Many new
product ideas, after years of caring, do not reach the market
at all. Considerable time, money and effort are thus wasted.
•
New products suffer from a high rate of market failure. That
means that even those products which reach the market after
21
years of preparation and work, often fail miserably in the
market.
•
Even in the case of successful new products, success is short
lived. Many of them suddenly die out after the initial boom.
Now wonder, new product development has mostly remained the
forte of big companies who can absorb the cost and fatigue of such failures.
7.5.1 How to Avert New Product Failures
Analysis shows that several new products turn out to be failures not
because the products are defective, but because the company in question
is not equipped to handle that product. Such a situation arises because
the firm has not answered and solved certain basic questions at the
product idea stage itself. Before a firm proceeds with a new product idea,
it should find convincing answers to certain basic issues:
•
Does the proposed product remain close to the existing
business of the company? Close to the knitting? Or, does it
constitute an entirely new line of business to the company?
In the latter case, can be company handle the new business?
•
How new is the new product? Is it radically new for the
market? Or, is it similar in some way to already existing
products in the market? If it is a radically new product, how
long would it take to get established? Can the firm sustain the
long pioneering stage? If it is a time-toot product, can it makes
a living in a market already dominated by early entrants?
What is the current level of demand and what is the extent of
market share the new entrant can hope to get?
•
Is the product likely to invite retaliation from a strong
competitor, who is already in the same line or in a related line
of business? What are the resources of the firm proposing the
new product as compared to those of the dominant
competitors?
22
7.5.2 The Firm must be well prepared for meeting retaliation
from strong competitors
Similar screening has to be done on the possibility of retaliation from
strong competitors. If a medium size firm with only moderate resources on
hand is planning to introduce a new product, it should check whether it is
going to provoke a mighty competitor. The firm must have clarity about the
resource capacity and management style of such competitors. So, a firm
trying to introduce a new product has to do a lot of preplanning. While no
secret formula can be prescribed for the success of a new product, it should
be possible to avert costly new product failures by checking out some of
the issues discussed above.
7.6 PRODUCT ELIMINATION
Generally, a product cannot satisfy target market customers and
contribute to the achievement of an organization’s overall goals
indefinitely. Product elimination is the process of deleting a product from
the product mix when it no longer satisfies a sufficient number of
customers. A declining product reduces an organisation’s profitability and
drains resources that could be used instead to modify other products or
develop new ones. A marginal product may require shorter production
runs, which can increase per-unit production costs. Finally, when a dying
product completely loses favour with customers, the negative feelings may
transfer to some of the company’s other products. Most organizations find
it difficult to eliminate a product. A decision to drop a product may be
opposed by management and other employees who feel the product is
necessary in the product mix. Salespeople who still have some loyal
customers are especially upset when a product is dropped. Considerable
resources and effort are sometimes spent trying to change a slipping
product’s marketing mix to improve its sales and thus avoid having to
eliminate it.
23
7.7 SUMMARY
Organisations must be able to adjust their product mixes to compete
effectively and achieve their goals. A product mix can be improved through
line extension and through product modification. Line extension is the
development of a product that is closely related to one or more products in
the existing line, but is designed specifically to meet different customer
needs.
Product modification is the changing of one or more characteristics
of a firm’s product. This approach to altering a product mix can be effective
when the product is modifiable, when customers can perceive the change,
and when customers want the modification. Quality modifications are
changes that relate to a product’s dependability and durability. Changes
that affect a products’ versatility, effectiveness, convenience; or safety are
called functional modifications. Aesthetic modifications change the
sensory appeal of product.
Developing new products is a way of enhancing a firm’s product mix
and/or adding depth to the product line. A new product may be an
innovation that has never been sold by any organization; a product that a
given firm has not marketed previously, although similar products may
have been available from other organizations; or a product brought from
one market to a new market.
Before a product is introduced, it goes through the eight phases of
the new product development process. In the idea generation phase, new
product ideas may come from internal or external sources. In the process
of screening, ideas with the greatest potential are selected for further
review. There are several key questions a company should ask when
reviewing an idea for a new product. What will the concept of the product
be in the mind of the consumer? What sales and promotional methods will
be appropriate and how profitable will the product be? Does the product
24
fit within the company’s current mission, purpose, and product portfolio?
Who is the target market for the product and how long is the demand
expected to continue? Who are the current and possible future
competitors? And what is the overall probability of its success? Concept
testing, the third phase, involves having a small sample of potential
customers review a brief description of the product idea to determine their
initial perceptions of the proposed product and their early buying
intentions. During the business analysis stage, the product idea is
evaluated to determine its potential contribution to the firm’s sales, costs,
and profits. Product development is the stage in which the organisation
finds out if it is technically feasible to produce the product and if it can be
produced at a cost low enough to make the final price reasonable. Test
marketing is a limited introduction of a product in areas chosen to
represent the intended market. The decision to enter the commercialization
phase means that full-scale production of the product begins and a
complete marketing strategy is developed.
The process that buyers go through in accepting a product includes
awareness, interest, evaluation, trial, and adoption. Adopters fall into five
main categories: innovators, the first to adopt a new product; early
adopters, who select new products carefully; early majority, which adopts
just before the average person; late majority, the sceptics who adopt new
products because of economic necessity or social pressure; and laggards,
who adopt last.
Product elimination is the process of deleting a product that no
longer satisfies a sufficient number of customers. Although a firm’s
personnel
may
oppose
product
elimination,
weak
products
are
unprofitable, consume too much time and effort, may require shorter
production runs, and can create an unfavourable impression of the firm’s
other products. A product mix should be systematically reviewed to
25
determine when to delete products. Products to be eliminated can be
phased out, run out, or dropped immediately.
7.8 KEYWORDS
Discontinuous innovation: A product that is entirely new and no
previous product performed an equivalent function.
Go error: An error of selecting a poor idea that should have been
dropped at the time of screening the ideas.
Drop error: An error of dropping a good idea that should have been
selected at the time of screening the ideas.
Concept testing: Research procedures used to learn consumers’
reactions to new product ideas. Consumers are presented with an idea and
are asked whether they like it, would use it, would buy it, and so on.
Test marketing: A controlled experimental process where a new
product is tested under realistic market conditions in limited geographical
areas.
Diffusion process: The process of spreading of a new product through
society.
Laggard: A member of the group of final adopters in the diffusion
process.
7.9 SELF ASSESSMENT QUESTIONS
1.
Compare and contrast the three major ways of modifying a
product.
2.
Identify and briefly explain the seven major phases of the new
product development process.
26
3.
Do small companies that manufacture one or two products
need to be concerned about developing and managing
products? Why or why not?
4.
What is the major purpose of concept testing, and how is it
accomplished?
5.
What are the benefits and disadvantages of test marketing?
6.
Why does the process of commercialisation sometimes take a
considerable amount of time?
7.
What are the stages in the product adoption process, and how
do they affect the commercialisation phase?
8.
When developing a new product, a company often test markets
the proposed product in a specific area or location. Coca-Cola
did this with its sports drink, PowerAde. Suppose you wish to
test-market your new revolutionary Super Wax car wax, which
requires only one application for a lifetime finish. Where and
how would you test market your new product?
9.
Generally, buyers go through a product adoption process before
becoming a loyal consumer. Describe your experience adopting
a product you now use consistently. Did you go through all the
stages?
10.
A product manager may make quality, functional, or aesthetic
modifications when modifying a product. Identify a familiar
product that recently has been modified, categorize the
modification (quality, functional, or aesthetic), and describe
how you would have modified it differently.
27
7.10 REFERENCES/SUGGESTED READINGS
1.
William M. Pride O.C. Ferrel: Marketing Concepts and
Strategies,
Tenth
Edition,
All
India
Publishers
and
Distributors Regd., Educational Publishers Chennai.
2.
David W. Cravens, Gerald E. Hills, and Robert B. Woodruff:
Marketing Management, A.I.T.B.S. Publishers and
Distributors (Regd.) Delhi- 110 051 (India).
3.
V.S. Ramaswamy, S. Namakumari: Marketing Management,
Planning, Implementation and Control, The Indian Context,
Second Edition, Macmillan India Ltd.
28
LESSON-8 BRANDING, PACKAGING AND
LABELLING
STRUCTURE
8.0
Objective
8.1
Understanding the Term Marketing
8.2
Marketing Process
8.3
Product
8.4
Brand
8.5
Brand equity
8.6
Branding strategies
8.7
Brand name decisions
8.8
Packaging
8.9
Packaging strategies
8.10 Labelling
8.11 Summary
8.12 Keywords
8.13 References/Suggested readings
8.0 OBJECTIVE
Objective of the chapter is to acquaint the students with the concept
of Branding, Packaging and Labelling, their importance in marketing
decisions, their relationship with other concepts and strategies of
marketing.
8.1 UNDERSTANDING THE TERM MARKETING
Let us start with very basic question that:
Why marketing is needed?
1
“Just Imagine: a businessman made a good quality product, using all
latest technology and sold it at reasonable price and spent a good amount
on advertisement. Yet- the product failed!”
Won’t it surprise you? Despite all this a product could fail!
Yes! We can see plenty of examples in our day to day life. But why
does even a good quality product will fail? This will be a very obvious
question troubling your mind.
To find an answer just remember your recent few purchases and try
to answer the following questions:
1.
Why did you buy the product?
2.
Was it the product that you bought or you actually bought a
benefit or as a set of benefits that would satisfy some of your
need(s) which were troubling you.
Your answer would be that you actually bought the benefits which
satisfied your needs (that was troubling you) and the said product offered
you those benefits.
So you would buy the product that would offer you the most desirable
set of benefits at most lucrative offer. Any product that does not directly
address to the needs of consumer is likely to fail later or sooner.
Now it is clear that a product is bought because it has the ability to
satisfy our need(s) which we may be well aware of or even may be unaware
and are guided by our subconscious or hidden desires.
Now, another question is- who would be a better marketer?
Certainly, the one who understand or knows our needs and desires
and make products accordingly would be a better marketer.
2
But it is not that simple. It is a quite complex process to market a
product. In this process a marketer first of all has to know the needs and
desires of consumers, then to make goods and services (products) that
would fulfil them And not just this, a consumer would have to be
communicated about their needs and desires and about the products that
would fulfil them. Then these products would have to be made available to
them at their nearest places at prices they feel appropriate, and finally to
know if all these efforts have really satisfied them (or not).
By now you might have got a little feel of what marketing is! Now we
can try to define marketing.
“Marketing is a process of identifying consumers’ needs, transforming
them into viable physical products, and services, and then reaching
consumers in most efficient and effective manner”.
The American Marketing Association offers the following definition:
“Marketing is the process of planning and executing the conception,
pricing, promotion, and distribution of ideas, goods and services to create
exchanges that satisfy individual and organisational objectives”.
The great marketing guru, Philip Kotler, writes, “Marketing is a social
and managerial process by which individuals and groups obtain what they
need and want through creating and exchanging products and value
through others”.
8.2 MARKETING PROCESS
We can understand this entire process clearly with the help of the
following figure (8.1).
3
Figure 8.1
Now it is amply clear as what marketing is. This entire marketing
effort has to be properly planned, organised, executed and controlled
keeping in mind the ever changing environment. Because changing
environment not only affects our efforts to market the products but also the
human needs and wants. Before understanding this entire process as
displayed in the diagram we must try to know the meaning of few terms
that we will be using time and again.
(i)
Needs: Need is a state of felt deprivation. It is a mental or
physical state of being that arouse a tension for want of something i.e.
deprivation of energy in human body would create a feeling of hunger that
would result into need of something that would fulfil it (food).
(ii)
Wants: When we assign our need a meaning according to the
culture, society and the personality of the person it becomes want i.e. a
4
hungry person in north India will want chapati to eat and in south India he
will like rice.
(iii)
Demand: Want backed by purchasing powers and willingness
to buy a particular product is called demand. One may have unlimited
wants, but these remains desires if not backed by adequate money and
willingness to depart with money for a given product.
(iv)
Product: A bundle of utilities that satisfy our needs, which is
tangible (goods) or intangible (services of doctor, lawyer, insurance) that
have ability to satisfy our needs and wants.
Now let’s understand the entire marketing process.
1.
Identifying needs: As discussed earlier it is not the product
as such that marketers sell, rather a set of benefits that can satisfy
consumers’ needs. So it is of paramount importance for marketers to look
for unfulfilled needs and wants, especially those which are felt strongly in
given time period in given surroundings. This is not an easy task as such
and requires an in-depth study of what is going on in the minds of people
and what factors in their environment are affecting them.
This is done with the help of Marketing Research that enables the
marketers to know the various needs and wants of people, who then can
decide which of these unfulfilled needs and wants he can cater to more
efficiently and effectively. Which of the needs, a marketer will decide to
cater, depend on the core strength, expertise and earlier experience of the
marketer on one hand and lucrative ness of the market on the other.
2.
Transforming needs and wants into Products: On the basis
of factors discussed above a marketer’s in next step is to decide what types,
styles, forms and variety of products can fulfil these needs. Here marketer
has to manage for required resources, manpower, raw material, expertise
and technology. Not only this all decisions regarding products like their
5
colours, shapes, sizes, packing are also made keeping in mind again the
kind of buyers the marketer is catering to, for example, an insurance
marketer will have to offer different types of insurance products for rich
classes, low income group, business community, servicemen etc.
3.
Communicating with target Consumers: Making a product
that will satisfy the needs of consumer doesn’t end the job of a marketer. It
has to be communicated to the people for whom the product has been made
and also as to which of the needs it can satisfy. The marketers also have to
decide about media to communicate through and the contents of the
message. This process is known as promotion, it includes tools like
advertisements, public relation, sponsoring of events, personal selling and
all other means of communication through which consumers can be made
aware about the product.
4.
Reaching the targeted consumer: Next a marketer has to
decide about how to reach the end users, which channels, transportation
and people (intermediaries like wholesaler, retailer, agents etc.) he will be
using to make products available at nearest possible places to the ultimate
consumer and keeping the cost minimum possible at the same time. This
process is known as distribution and logistics management.
5.
Feedback: Marketer has to ensure whether his product has
really satisfied the consumer’s need it was meant for. If consumer is not
satisfied then, reasons have to be sought out and removed. This is a
continuous and never ending process as consumer’s needs- preferences,
and expectations from the product and the marketer keep changing. So a
marketer must watch the consumer’s satisfaction level and changing needs
and wants, so as to be able to incorporate the desired attributes in the
product before it becomes obsolete or overtaken by competitors.
Having a brief look on marketing and its core aspects, now let us
begin with branding. Before gaining in depth of the branding we must know
6
that what is product because it is the product to which we give any name
or identity.
8.3 PRODUCT
Product can be anything that is offered to the market to satisfy need
and wants. People satisfy their need and wants through products. Product
is not just limited to the tangible goods. Broadly, defined it also includes,
services, person, place, event, experiences, information etc. Soaps,
insurance, hamburgers, museum etc. all are products.
Product can be classified as durable goods and non durable goods on
the basis of durability and as a convenience goods (that the customer
purchases frequently, immediately e.g. soaps, toothpastes etc.); shopping
goods (that the customers purchases on the basis of comparison in terms
of quality, suitability price etc. car, scooter, banking services); Speciality
goods (that which are purchased because of unique characteristics e.g.
audio, video system etc.) The product could be an industrial good.
Industrial products are those which are purchased for further processing.
Thus, distinction can be made between industrial and consumer product
by the purpose for which product is purchased e.g. if a consumer buys a
lawn mower for the use at home it is consumer product and if the same is
used for landscaping business, it is industrial product. We can further
divide industrial product into three parts i.e. materials and parts (that enter
the manufacturer’s production or operations) and supplies and services
(that facilitate development of finish product).
8.4 BRAND
What is brand? It is nothing but a way of creating an identity for a
product, somewhat like quick example comes to mind is that of Amitabh
Bachan whose name evokes a certain identity. When you think of his
personality, you automatically identify him through certain characteristics
7
and qualities which make him uniquely distinguishable from many other
stars. Similarly, when we want to sell or buy a product we don’t think in
terms of product in general but we are required to identify the particular
brand within entire product range which we like e.g. when we go to
purchase shaving cream we do not ask for any shaving cream, we ask for
specific brand, i.e. old spice, Denim etc.
Is it simple as that? Of course, not. It takes lot of time to become the
Big B. A brand is sum total of the particular satisfaction that it delivers to
the consumers who buys that specific brand.
We relate to brands in many ways. As consumers, we can remember
some brands with which we are familiar and therefore, we expect certain
standard of quality from these brands e.g. when we want to buy a washing
powder, we specifically ask for Surf, Ariel or some such brand.
The American Marketing Association defines a brand as:
“A brand is a name, term, sign, symbol, design, or a combination of
these, intended to identify the goods and services of one seller or group of
sellers and to differentiate them from those of competitors”.
A brand is different from other assets such as patents and copy write
which have expiry dates. Consumer view a brand as an important part of a
product and branding can add a value to a product. Consumer’s perception
of a product is very much dependant upon the brand. When a consumer
becomes loyal to any brand he or she start saying that I want Godrej, I want
Bajaj etc. The best brands convey a warranty of quality.
Thus, we can say that brand gives identity to the product. It tells
about quality of product. Brand loyal as know very well the features and
benefits of the product each time they buy.
8
From the seller’s point of views also, the brand name gives the whole
summary about the product. It provides legal protection for unique product
feature. Marketer should develop a deep set of positive associations for the
brand. Marketers must know at which level to anchor the brand identity. It
would be a big mistake to promote only attributes. Firstly, because the
buyers are not as mature and interested in the attributes of the product as
the benefits. Second, competitors can easily copy attributes. Third, current
attributes may become less desirable tomorrow.
8.5 BRAND EQUITY
Brand Equity encompasses a set of assets linked to a brand’s name
and symbol that adds to the value provided by a product or service to the
consumers. There is always underlying expectation that the brand will
deliver the satisfaction it has promised. A consumer expects a certain
standard of quality and satisfaction which the manufacturer has to make
sure and that the product lines up to that expectations, otherwise the
consumer will stop buying that product. Simply speaking that brand
identities primarily exist in the minds of its customers. A brand is his or
her evaluation of performance of that brand. And if his evaluation is positive
the customer is willing to pay more for a particular brand over another
similar product. This is the strength of Brand Equity. “The brand equity
refers to the value inherent in a well known brand name. From a
consumers’ perspective, brand equity is the added value bestowed on the
product. Brand equity facilitates the acceptance of new products and the
allocation of preferred space, and enhances perceived value, perceived
quality and premium pricing option. Because of the escalation of new
product costs and high rate of new product failures, many companies prefer
to leverage their brand equity through brand extensions rather than risk
launching a new brand.
9
Brand equity enables companies to charge a price premium e.g.
researchers have estimated that because of colgate brand equity, the
colgate pamolive company is able to price colgate toothpaste about 37 cents
higher than competitive store brands with objectively identical attributes.
A brand with strong brand equity is very valuable asset. According to
one estimate, the brand equity of Malboro is $ 45b; Coca Cola– $ 43b, IBM–
$ 18b, Disney– $ 15b & Kodak– $ 13b. The worlds’ top brands include Cocacola, Campbell, Disney, Kodak, Sony, Mercedes-Benz, McDonalds.
A relatively new strategy among some marketers is co-branding. The
basis of co-branding is in which two brand names are featured on a single
product. For example, Hero-Honda, Maruti-Suzuki to use another product’s
brand equity to enhance the primary brands equity.
Brand equity ensures a high level of consumer brand awareness and
loyalty. Because of high brand extension e.g. Coca-Cola-Diet coke, it allows
more leverage in bargaining with distributors and retailers. Customers are
ready to pay a premium because of perceived reliability, trust worthiness,
as well as the positive image of superior quality that the brand commands.
The major assets of brand equity are:
(i)
Brand awareness: This refers to the strength of a brands
presence in the mind of the consumer. Awareness is measured according
to the recognition and the recall of brand.
(ii)
Perceived Quality: Perceived quality means level of expected
quality that product holds in the mind of consumer, are buying; and in that
sense, it is the ultimate measure of the impact on the mind of consumer.
(ii) Brand Loyalty: A brand’s value to the company is a measure of
customers’ loyalty towards a brand. Since a company consider loyalty as a
major assets which encourages and justifies loyalty buildings program,
which, in turn, helps create and enhance Brand Equity.
10
Brand Personality: In totality brands holds more meaning and
.importance than tangible or perceivable product seems to offer.
This is a highly promised concept, both in theory and practical
relevance, when it comes to positioning brands with non functional values,
in form of feeling it arouse in consumer: Raymond- a complete man,
Cadbury’s– a gift of love. Many brand strategy statements nowadays refer
to the personality of the brand. However, brand managers using these
statements often tend to define character for several brands in the
company’s line in more or less identical terms e.g. for many OTC (over the
counter) remedies, the Brand character is monotonously described as
caring and efficient. So, the key lines in building different and distinct
brand personality.
The purpose of positioning by brand personality is lost if we are
unable to define a desired personality for our brand which is clearly distinct
from the personalities of competing brands and sister brands in our own
product line.
Now the question arises: what is Brand image? Brand personality?
David Ogilvy, writing, on the image and the brand, regards ‘image’
and ‘personality’ as synonymous. “The manufacturer who dedicates his
advertising to building the most favourable image, the most sharply defined
personality, is the one who will get the largest market share at the highest
profit in the long run”.
Christine Restall of Meann- Erickson draws a distinction.
“Brand image refers to rational measurements like quality, strength,
flavour. Brand personality explains why people like some brands more than
others even then when there is no physical difference between them”.
11
It would seem that Restall considers brand personality as being made
up of the emotional association of brands and brand image, of its physical
features and benefits.
The brand image represents the essence of all the impressions or
imprints about the brand that have been made on the consumers mind. It
includes impression about the physical features and performance;
impression about functional benefits from using it; imagery and symbolic
meaning it evokes in the consumer’s mind. Brand image indeed is the
‘totality’ of brand in the perception of the consumer.
Brand personality is that aspect of the brands totality which bring up
in the mind of the consumers its emotional overtones and it symbolisms its
characterisations, if you will. The great operational utility of brand
personality is that when the consumer cannot distinguish brands by their
physical features or functional benefits, he is invited to look at their socalled human characteristics. It makes his task simpler in judging whether
it is his kind of product or not.
So, brand image represents the totality of impressions about the
brand as selected and adopted by the consumer’s perception. It embraces
the brands physical and functional aspects and also it symbolic meanings.
The brand personality, on the other hand, dwells mainly in these symbolic
aspects. It must match the target prospect’s self concept “I see the brand
in myself’.
8.6 BRANDING STRATEGIES
Brand Extension
A successful brand is like a powerhouse containing enough energy to
illuminate distant territories. Such a brand name holds enormous appeal
for consumer. It has stood the test of time and competition. This is driving
12
force behind brand extension, where the power of one brand could be used
to market other related products.
This is what explains the extension from Ivory soap to Ivory shampoo,
from Dettol antiseptic to Dettol soap, from P&G Dreamflower talc to
Dreamflower soap.
The other driving force is the present day high cost of launching an
altogether new brand with increasingly competitive market and escalating
media costs, it makes sound financial and marketing sense to spin out the
inner force of a respected brand for new incarnation with brands that are
in declining phase of their life cycle as well as those in the prime of life. The
brand name may lose its special positioning in consumer’s mind through
over extension Brand dilution occur when consumers no longer associate a
brand with a specific product or highly similar product The best result
would occur when the brand name build the sale of both the new product
and the existing product.
Line Extension
Line extension refers to additions to an existing product line of a
company in a given category to fill out the line. Thus, Marvel was addition
to the Godrej toilet soap line which already included Cinthol and Fresca
Wheel was a line extension to Hindustan Livers line of detergent bars which
already had Rin. Use of same brand name for a line extension can be tricky.
Can you imagine the present Cinthol, a Cinthol Shikakai soap and a cinthol
with its beauty cream all fighting far a place in the consumer’s mind. The
other situation where it might work in the form of extra strength like clinic
shampoo and clinic plus or vicks vaporub and Vicks Vaporub plus. But
there too, the dangers of cannibaliation are high.
13
Multi-Brand
Companies often introduce additional brands in the same category.
Multi-branding offers a way to establish different features and appeal to
different buying motives. It also allows a company to look up more reseller’s
shelf space. Finally, companies may develop separate brand names for
different regions or countries, perhaps to suit different cultures or
languages e.g. P&G dominates the U.S. laundry detergent market with Tide,
which in all form captures more than 40% market share. But, in multibranding each brand might obtain only a small market share, and none
might be very profitable.
New Brands
A company may create a new brand name when it enters a new brand
category for which none of the company’s current brand names are
appropriate like Japan’s Matsuishita uses separate brand name-for its
different families of product. Technics, Panasonic, National and Quasar. If
Timer decides to make toothpaste, it is not likely to call them Timex toothbrushes. Yet establishing a new brand name in US market place for a mass
consumer packaged good can cost anywhere from $ 50 million to $ 100
million. Thus P&G and other large consumer product marketers are new
pursuing megabrand strategies- weeding out weaker brands and focusing
their marketing skills only and brands that can achieve number one or two
market share positions.
8.7 BRAND NAME DECISIONS
Marketers have to decide, while branding the product, which brand
names to use. Four strategies are available.
14
1.
Individual names
In this, company gives separate name to each product. So if the
product fails or appears to have law quality, the company’s name is not
hurt e.g. sprite by Coca-cola.
2.
Blanket Family Names
In this case company gives corporate name to the product.
Development cost is less because there is no need for name research as
heavy expenditures to create bran<;l name recognition. Furthermore, sale
of product is likely to be more if the corporate image is good e.g. Bajaj,
Godrej, IBM.
3.
Separate Family Names for All Products
Here company after inventing different family names for different
quality lines within the same product class e.g. HLL has different brand
names within soap category ego Liril, Lux, etc.
4.
Company trade name combined with individual Product
Names
Some manufactures tie their company name to an individual brand
name for each product, e.g. Kellogg’s Rice Krispies, Kallog’s Raissin Bron
and Kallog’s Corn Flakes.
Care should be taken at the time of deciding brand name. It should
suggest something about the products benefits. Examples- Boost, Sunsilk,
Ayur etc. It should suggest about product qualities e.g. 5star chocolates,
milk maid, Lazer blades.
It should be easy to pronounce, recognise, and remember e.g. Godrej,
IBM, Sony. It should not carry poor meanings in other countries and
15
languages e.g. Nova is a poor name for a car to be sold in Spanish speaking;
it means ‘doesn’t go’.
8.8 PACKAGING
Even after the development of product and branding that product,
needs arise to fulfil the other aspects of the marketing mix. Most physical
products have to be packaged and labelled. One such product feature, and
a critical one for some products, is packaging which consists of all the
activities of designing and producing the container or wrapper for a
product.
“Packaging includes the activities of designing and producing the
container for a product”.
The above definition shows that package is the actual container or
wrapper. Thus, packaging is a one of the important function of the business
as it is the package, where first get the attention of the customers. It has
become a potent marketing tool. Well designed packages can create
convenience and promotional value.
Packaging and the resulting packages are intended to serve several
vital purchases.
(i)
It protects a product in a way to the consumer.
(ii)
It provides protection to the product after it is purchased.
(iii)
Package size and shape must be suitable for displaying and
stocking the product in the store.
(iv)
It helps to identify a product and this may prevent substitution
of competitive products.
Packaging is also one of the way through which marketer can
differentiate his product from the competitive brand. Moreover, customers
are ready to pay a little more for convenience, appearance, dependability
16
and the prestige of better packages. Packages also contribute to the instant
recognition of the company or brand. Thus, innovative packaging can bring
large benefits to the customers and profit to producers. If other marketing
mix are comparable, retailers are likely to purchase and display products
having attractive functional packaging.
Despite of having various benefits of the packaging, there are certain
limitations; which are as follows:
1.
Packaging depletes natural resources
2.
Packaging is too expensive
3.
Some forms of plastic packaging are health hazards.
4.
Packaging is deceptive
The biggest challenges facing packagers is how to dispose of used
container.
8.9 PACKAGING STRATEGIES
To manage the packaging of a product, executives must make the
following strategic decisions.
Packaging the product line: A company must decide whether to
develop a family resemblance when packaging related products. Family
packaging uses either highly similar packages for all products or packages
with a common and clearly noticeable feature. For example, compbell soup
uses virtually identical packaging on all its condensed soup products. When
new products are added to a line recognition and images associated with
established products extend to the new ones.
Multiple Packaging: It is a practice of placing several units of the
same product in one container. Candy bar, towels, beer, cricket balls are
packaged in the multiple units.
17
Changing the package: A firm may need to correct a poor feature in
an existing package. It may want to take the advantage of a new
development as the container made up of lamination of papers, plastic and
aluminium foil. However, this farm of packaging might be slowed because
it is not biodegradable.
Facing rising cost, many producers feel the need to increase the
prices. However, they fear consumer resistance. What can they do? A
number of companies turn to reducing the amount of product in a package
while maintaining the price.
8.10 LABELLING
Labelling, which is closely related to the packaging, is another feature
that requires managerial attention. A label is a part of the product that
carries information about the product and the seller. A label may be part of
a package or it may be a tag attached to a product. The seller must label
products. The label might carry only the brand name or a great deal of
information. Labels are of three types:
1.
Brand label: Brand label is simply the brand alone applied to
the product or package. Some clothes carry the brand label like Mc wear.
2.
Descriptive label: It gives the information about the product
use, care, performance, and other features. On a descriptive label for a
Maggi Noodles, there are statements concerning the weight, ingredients,
tastes, price etc.
3.
A Grade Label: It identifies the product judged quality with a
letter, number, or word. Corn and wheat are grade-labelled 1 and 2.
Brand labelling is a acceptable form of labelling but it does not
provide sufficient information about the product. Descriptive labels provide
18
more information about the product but not necessarily all that is needed
or desired by a consumer.
There is a long history of legal concerns surrounding labels, as well
as packaging. The public’s complaints about false or deceptive labelling and
packaging have led to a number of Federal Labelling Laws. In 1914, the
Federal Trade Commission Act held that false, misleading, or deceptive
labels or packages constitute unfair competition. Even with this legislation,
consumer discontent with labelling and packaging did not disappear.
Consumer still charged, for example, that labels contained incomplete as
misleading information and there were a confusing number of sizes and
shapes of packages or a given product. Congress responded with the Fair
Packaging and Labelling act (1966).
This law provide for (1) mandatory labelling requirements (2) an
opportunity for business to voluntarily adopt packaging standards that can
limit the proliferation of the same product in different weights and measure
and (3) administrative agencies, notably the Food and Drug Administration
and the Federal Trade Commission, with the discretionary power to set
packaging regulation. The Food and Drug Administration has required
processed food producers to include nutritional labelling that clearly state
the amount of protein, fat, carbohydrates, and calories contained in the
products, as well as there vitamin and mineral content as a percentage of
the recommended daily allowances. Consumerists have lobbied for
additional labelling laws to require opening date (to describe product
freshness), unit pricing to state the product cost in standard measurement
units), grade labelling (to rate the quality level), and percentage labelling (to
show the percentage of each important ingredient).
8.11 SUMMARY
So it is quite clear that branding, packaging and labelling are not
separate decisions of marketing but are a part of overall marketing
19
philosophy with which a marketer wishes to reach its target customer by
creating a specific and distinct image regarding his product in the mind of
consumer. Branding, packaging and labelling are the tools that help
marketers in their endeavour. A brand is a name, term, symbol, sign or
design that distinguishes one product from competitor’s product. Packaging
products a containment function, a protection-in-transit function, a
promotion function, and an ecological function. Delivery, gift, repair and
other customer services all can be important aspects of a product strategy
to create competitive advantage.
8.12 KEYWORDS
Family branding: The practice of using a single brand name to
identify different items in a product line.
Individual brand: A brand that is individually named and do not
match with other items in the same product line.
Private brand: A brand that is owned by a retailer, wholesaler, or a
distributor rather than by a manufacturer of the product.
Label: The sticker attached to a container to carry product
information.
Brand equity: The value associated with a brand. Profit margins and
market share are much more because of goodwill associated with the brand.
Packaging: It includes labels, instructions, graphic design, shipping
cartons, and sizes of containers.
8.13 REFERENCES/SUGGESTED READINGS
1.
Marketing Management: Philip Kotler.
2.
Fundamentals of Marketing: W.J. Stanton.
20
3.
Marketing: E. Hill.
4.
Brand Positioning: S. Sengupta.
21
LESSON-9
PRICING METHODS AND STRATEGIES
STRUCTURE
9.0
Objective
9.1
Price: its meaning
9.2
Importance of pricing decisions
9.3
Pricing objectives
9.4
Pricing methods
9.4.1 Cost-Based Pricing Method
9.4.2 Demand-Oriented Pricing Method
9.4.3 Price Elasticity Method
9.5
Pricing strategies
9.5.1 Value Pricing
9.5.2 The maximum acceptable price
9.5.3. Price leadership
9.5.4 Pricing new products
9.5.5 Skimming pricing strategy
9.5.6 Penetration price strategy
9.5.7 Product line pricing
9.5.8 Price Bundling
9.5.9 Premium pricing
9.5.10 Image pricing
9.6
Summary
9.7
Keywords
9.8
Self Assessment questions
9.9
References/Suggested readings
1
9.0 OBJECTIVE
After reading this lesson, you must be able to discuss
•
the meaning and significance of price in marketing decisions
•
the pricing objectives of different firms;
•
methods for price determination;
•
the pricing strategies used across different products and
product life cycle.
9.1 PRICE: ITS MEANING
Every product has a price, but each firm is not necessarily in a
position to determine the price at which it should sell its product. When
products are undifferentiated and competitors numerous, the firm has no
market power and must take the price level imposed by the market. But
when a firm has developed strategic marketing programme and thus has
gained some degree of market power, setting the price is a key decision
which conditions the success of its strategy, to a large extent. Until
recently, pricing decisions were considered from a purely financial
viewpoint, and largely determined by costs and profitability dimensions.
This approach changed because of the upheavals in the economic and
competitive situation during the crisis years: double digit inflation,
increased costs of raw materials, high interest rates, price controls,
increased competition, lower purchasing power, consumerism etc. All
these factors play an important part in making pricing decisions of
strategic importance. Figure 1 describes the general overview of price
setting in a competitive environment.
From the firm’s point of view, the question of price has two aspects:
the price is an instrument to stimulate demand, much like advertising, and
at the same time price is a determinant factor of the firm’s long-term
profitability. Therefore, the choice of a pricing strategy must respect two
2
types of coherence: an internal coherence, i.e. setting a product price
respecting constraints of costs and profitability, and an external
coherence, i.e. setting the price level keeping in mind the market’s
purchasing power and the price of competing goods. Furthermore, pricing
decisions must remain coherent with other elements of marketing mix
especially brand positioning and distribution strategy, advertising etc.
3
Figure 1: Overview of pricing decisions
Price is the monetary expression of value and as such occupies a
central role in competitive exchange. Purchasing behaviour can be seen as
a system of exchange in which searching for satisfaction and monetary
sacrifices compensate each other. This behaviour results from forces that
balance a need, characterized by the buyer’s attitude towards the product
and the product’s price. From the buyer’s point of view, the price he or she
is willing to pay measures the intensity of the need and the quantity and
nature of satisfaction that is expected; from the seller’s point of view, the
price at which he or she is willing to sell measures the value of inputs
incorporated in the product, to which the seller adds the profit that is
hoped to be achieved.
Formally, monetary price can be defined as a ratio indicating the
amount of money necessary for acquiring a given quantity of a good or
service:
Amount o f money provided by the buyer Quantity of good provided by
the seller
Price=
In this equation, both the numerator and the denominator are
important for price decisions. Typically, for example, if the buyer gets 5
kilograms of basmati rice for Rs. 125, then to the seller the price is Rs. 125
and to the buyer it is 5 kilograms of basmati rice. The seller can change
this ratio of Rs. 25 for 1h:g basmati rice in different ways as mentioned
below.
(a)
Changing the customer’s value perception of the product: The
seller can change the customer’s value perception of the product by
modifying the presentation of the product, for example, a seller, who has
till now been marketing basmati rice as a commodity and selling it in bulk
to the wholesaler, now decides to clean, pack and brand the product. He
also decides to provide a recipe of different pulaos and biryanis and get the
4
true basmati flavour. All this makes the same product look different and
the seller is now investing resources to create brand equity for his brand
of basmati rice. He may charge premium of a rupee or two per kilogram,
but will the customer pay this differential? The answer to that will be in
knowing how the customer perceives these changes in the product.
(b)
Change the quantity of money or goods and services to be paid
by the buyer: Another approach is to change the quantity of money or
goods and services to be paid for by the buyer. For example, the buyer has
to pay Rs. 32.50 per one kilogram of a well-known brand of sunflower
edible oil. This firm may offer 5 kilogram pack for just Rs. 160, thus giving
a saving of 50 paise per kilogram. Another approach is to increase or
reduce the price per kilogram of edible oil without the customer having to
necessarily buy a bigger pack.
(c)
Change the quality of goods and services offered: If the
quantity ratio does not change but the quality of the goods and services
has declined, then for the buyer, the real price has increased and viceversa.
(d)
Price changes through changes in sales promotion or discounts
to be applied for quantity variations: Sales promotion serves to reduce the
actual price paid by the buyer. So does a discount. This is particularly true
if the quantity ratio remains constant.
(e)
Changes in any of the following:
(i)
Time and place of transfer of ownership
(ii)
Place and time of payment
(iii)
Acceptable form of payment-like accepting credit cards
as a mode of payment. This often provides to the
customer four to six weeks (in some cases even more)
credit. The customer also, has the option to pay over ten
months.
5
Thus price is a complex decision that has a direct bearing on the
company’s profitability and the marketer needs to know the cost function
and also the customer perception of his and his competitors’ product value
at different price levels. To arrive at a good price strategy, the marketer
should be able to decide on the price objectives.
9.2 IMPORTANCE OF PRICING DECISIONS
The following points highlight the importance of pricing strategies in
the current marketing environment:
•
The chosen price directly influences demand level and
determines the level of activity. A price set too high or too low
can endanger the product’s development.
•
The selling price directly determines the profitability of the
operation, not only by the profit margin allowed, but also
through quantities sold by fixing the conditions under which
fixed costs can be recovered over the appropriate time·
horizon. Thus, a small price difference may have a major
impact on profitability.
•
The price set by the firm influences the product or the brand’s
general perception and helps in shaping brand’s image. The
price quoted invariably creates a notion of quality, and
therefore is a component of the brand image.
•
More than any other marketing variable, the price is an easy
means of comparison between competing products or brands
especially when there is hardly any brand differentiation. The
slightest change in price is quickly perceived by the market,
and because it is so visible it can suddenly overturn the
balance of forces.
•
Pricing
strategy
must
be
compatible
with
the
other
components of strategic marketing. Product packaging must
reinforce high quality and high price positioning; pricing
6
strategy must respect distribution strategy and allow the
granting of necessary distribution margins to ensure that the
objectives of covering the market can be achieved.
•
Acceleration of technological progress and shortening of
product life cycles means that a new activity must be made to
pay over a much shorter time span than previously. Given that
correction is so much more difficult, mistake in setting the
initial price is that much more serious.
•
Proliferation of brands or products which are weakly
differentiated, the regular appearance of new products and the
range of products all reinforce the importance of correct price
positioning; yet small differences can sometimes modify the
market’s perception of a brand quite significantly.
•
Increased
prices
of
some
raw
materials,
inflationary
pressures, wage rigidities and price controls call for more
rigorous economic management.
•
Legal constraints, as well as regulatory and social constraints,
such
as
price
controls,
setting
maximum
margins,
authorization for increases etc., limit the firm’s autonomy in
determining prices.
•
Reduced purchasing power in most economies makes buyers’
more aware of price differences, and this increased price
sensitivity reinforces the role of price as an instrument for
stimulating sales and market share.
•
Given the importance and complexity of these decisions,
pricing
strategies
are
often
elaborated
by
the
firm’s
management.
9.3 PRICING OBJECTIVES
All firms aim to make their activities profitable and to generate the
possible economic surplus. This broad objective can in practice take
7
different forms and it is in the firm’s interest to clarify from the outset its
strategic priorities in setting prices. Generally speaking, possible objectives
can be classified in three categories, according to whether they are centred
on profits, volumes or competition.
Profit-oriented
objectives
are
either
profit
maximization
or
achievement of a sufficient return on invested capital. Profit maximization
is the model put forward by economists. In practice, it is difficult to apply
this model. Not only does it assume precise knowledge of cost and demand
functions for each product, it also assumes a stability which is seldom
enjoyed by environmental and competitive factors. The objective of target
return rate on investment (ROI) is widespread. In practice, it takes the form
of calculating a target price, or a sufficient price; that is, a price which, for
a given level of activity, ensures a fair return on invested capital. This
approach, often adopted by large enterprises, has the merit of simplicity,
but is incorrect. It ignores the fact that it is the price level that ultimately
determines demand level.
Volume-oriented objectives aim to maximize current revenue or
market share, or simply to ensure sufficient sales growth. Maximizing
market share implies adopting a penetration price, i.e. a relatively low
price, which is lower than competitors’ prices, in order to increase volume
and consequently market share as fast as possible. Once a dominant
position is reached, the objective changes to one f ‘satisfactory’ rate of
return. This is a strategy often used by firms having accumulated a high
production volume and who expect reduced costs due to economies of scale
and learning effects. A totally different strategy is that of skimming pricing.
The goal here is to achieve high sales revenue given that some buyers or
market segments are prepared to pay a high price because of the product’s
distinctive (real or perceived) qualities. The objective here is to achieve the
highest possible turnover with a high price rather than high volume.
8
Competition-oriented objectives either aim for price stability or to be
in line with competitors. In a number of industries dominated by a: leading
firm, the objective is to establish a stable relationship between prices of
various competing products and to avoid wide fluctuations in prices that
would undermine buyers’ confidence. The objective of keeping in line with
other firms reveals that the firm is aware of its inability to exercise any
influence on the market, especially when there is one dominant firm and
products are standardized, as in undifferentiated oligopolies. In this case,
the firm prefers to concentrate its efforts on competing over features other
than price. Forms of non-price competition will prevail in the market.
9.4 PRICING METHODS
To elaborate on pricing methods, three groups of factors must be
taken into consideration: costs, demand and price elasticity: We will now
examine successively each of these methods and their implications for
price determination.
9.4.1 Cost-Based Pricing Method
Starting with costs analysis is certainly the most natural way to
approach the pricing problem, and it is also the one most familiar to firms.
Given that the manufacturer has undergone costs in order to produce and
commercialize a product, it is natural that its main preoccupation would
be to determine various price levels compatible with constraints such as
covering direct costs and fixed costs arid generating a fair profit. Figure 2
shows a. typical cost structure in which the definitions of the main cost
concepts are given.
Prices which are based on costs and make no explicit reference to
market factors are called ‘cost-based prices’. Cost analysis identifies four
types of cost-based prices, each responding to specific cost and profit
requirements.
9
Figure 2: The elements of price
The floor price, or the minimum price, corresponds to direct variable
costs (C), also known as ‘out-of-pocket costs’. It is the price that only covers
the product’s replacement value, and, therefore, implies zero gross profit
margin.
Floor price = Direct variable costs
This price concept is useful for negotiating exceptional orders or for
second marketing discounting, when the firm has unused capacity and has
the possibility to sell in a new market such that there will be a negligible
loss of sales in its main market. Floor price, also called ‘marginal price’, is
the absolute minimum selling price the firm should accept. Any price above
the floor price can allow a firm to use its production capacity to a maximum
and still generate extra funds to cover overhead or improve profits.
Exceptional orders, generics for large retail chain and foreign markets,
provide opportunities for this form of discriminatory pricing strategy.
The break-even price (BEP) corresponds to the price where fixed
costs and direct costs are recovered, given the sales volume assumed. It
10
ensures that both the product’s replacement value as well as fixed costs
(F) are recovered where E(Q) denotes expected sales volume. The BEP
corresponds to the full cost concept, where the level of activity is used as
criterion for allocating the fixed costs.
The mark-up price is set by adding a standard mark-up to the breakeven price. Assuming that the firm wants to earn a 20 per cent mark-up
on sales, the mark-up price is given by
Mark-up price = BEP/(l–desired mark-up)
This pricing method, popular for its simplicity, ignores demand and
competition. It will work only if the expected sales level is achieved.
The target price, or sufficient price, includes, apart from direct costs
and fixed costs, a profit constraint, which is normally determined by
reference to a ‘normal’ rate of return (r) on invested capital (K). This costbased price is also calculated with reference to an assumed level of activity.
Target price = C + F / E(Q) + rK/E(Q)
where K denotes invested capital and r the rate of return considered
as sufficient or normal. Like the break-even price, target price depends on
the activity volume being considered.
The same criticism must be formulated here. This pricing method
will work only if the expected sales volume is achieved.
Usefulness or cost-based pricing: Cost-oriented prices constitute a
starting point for setting a price. They cannot be the only basis for
determining prices because these pricing procedures ignore demand,
product perceived value and competition. However, they do have a real
usefulness, because they provide answers to ‘the following types of
questions:
11
•
What is the sales volume or sales revenue required to cover all
costs?
•
How does the target price or the mark-up price compare with
prices of direct competition?
•
To what level of market share does the level of sales at the
break-even point correspond?
•
In the case of a price change, what is the necessary volume
change to maintain the present level of profitability?
•
If prices go down, what is the minimum volume increases
required to offset the price decrease?
•
If prices go up, what is the permissible volume decrease to
offset the price increase?
•
What is the implied price elasticity necessary to enhance or
maintain profitability?
•
What is the rate of return on Invested capital for different price
levels?
Cost analysis is a necessary step which helps to identify the problem
by focussing attention on the financial implications of various pricing
strategies. Armed with this information, the firm is better placed to
approach the more qualitative aspects of the problem, namely market
sensitivity to prices and competitive reactions.
9.4.2 Demand-Oriented Pricing Method
Pricing based exclusively on the firm’s own financial needs is
inappropriate. In a market economy, it is the buyer who ultimately decides
which products will sell. Consequently, in a. market-driven organization
an effective pricing procedure starts with the price the market is most likely
12
to accept, which in turn determines the target. cost. The main factors
affecting price sensitivity are described below:
Factors affecting price sensitivity: Buyers, in general, are sensitive to
prices, but this sensitivity can vary tremendously from one situation to
another, according to the importance of the satisfaction provided by the
product, or conversely depending on the sacrifices, other than price,
imposed by obtaining the product. Nagle (1987) has identified nine factors
affecting buyers’ price sensitivity:
•
Unique-value effect: buyers are less price-sensitive when the
product is more unique.
•
Substitute awareness effect: buyers are less price-sensitive
when they are less aware of substitutes.
•
Difficult comparison effect: buyers are less price-sensitive
when they cannot easily compare the quality of substitutes.
•
Total expenditure effect: buyers are less price-sensitive the
lower the ex-penditure is to· a ratio of their income.
•
End benefit effect: buyers are less price-sensitive the lower the
expenditure is compared with the total cost of the end product.
•
Shared cost effect: buyers are less price-sensitive when part of
the cost is borne by another party.
•
Sunk investment effect: buyers are less price-sensitive when
the product is used in conjunction with assets previously
bought.
•
Price-quality effect: buyers are less price-sensitive when the
product is assumed to have more quality, prestige or
exclusiveness.
•
Inventory effect: buyers are less price-sensitive when they
cannot store the product.
13
9.4.3 Price Elasticity Method
A marketer for manufactured products needs to assess price
elasticity of demand. Price elasticity of demand refers to the changes in
demand in response to price changes. Specifically, this price elasticity of
demand is given by the following formula:
Percent change in quantit y demanded
Percent change in price =
Percent change in price
For example, if the firm is to consider changing the price of its
product by five per cent, and the demand for its product is likely to go down
by 10 per cent then, the price elasticity of demand for this product is -2.
In assessing the price elasticity of demand, the marketer has to consider
the following factors.
(a)
Availability of substitutes and/or competitor products: If there
are substitutes of competitors which are perceived by the customer to be
identical or comparable, then the price elasticity of demand will be high. It
is important to note that the customers’ perception of compatibility of
competing products to satisfy the need is more relevant here than the
compatibility on tangible features. For example, if the customer perceives
that he or she can quench thirst by either a soft drink or a fruit juice, then,
any change in price of any of these products is bound to affect its demand.
The other side of this coin is that lack of substitutes or competitor products
will mean low price elasticity of demand. Again, the price elasticity of food
products like wheat, rice, edible oil, etc. is lower than manufactured
product like soft drinks, television, etc.
(b)
Customer resistance to change: If the customers are resistant
to new product ideas and generally do not go shopping for prices, then the
price elasticity of demand for such product is going to be low. Mail order
14
and tele-shopping today is built around this assumption and its
communication is directed to motivate customers against price shopping.
(c)
Price-Quality perception: Generally the quality of a product is
associated with its price. The thumb rule is that customers’ perceive
premium quality in the product if it is priced at a higher level. If the target
customer group has this perception of the product, then its price elasticity
of demand is going to be low. Many marketers seek to change a customer’s
attitude towards this direction.
(d)
Buyers do not perceive or notice higher prices: If the buyers are
willing to buy the product ignoring its prices, then the price elasticity of
demand for such a product is going to be low.
Thus the nature of the product, competition and buyers’ value
perception play an important role in shaping the elasticity of demand for
the product at different price levels.
9.5 PRICING STRATEGIES
The different types of pricing strategies are discussed as under:
9.5.1 Value Pricing
Value pricing is a customer-based pricing procedure which is an
outgrowth of the multi-attribute product concept. From the customer’s
viewpoint, a product is the total package of benefits that is received when
using the product. Therefore, the customer- oriented company should set
its price according to customers’ perceptions of product benefits and costs.
To determine the price, the marketer needs to understand the customers’
perceptions of benefits as well as their perceptions of the costs other than
price. Customers balance the benefits of a purchase against its costs.
When the product under consideration has the best relationship of benefit
to cost, the customer is inclined to buy the product (Shapiro and Jackson,
15
1978). This customer-based pricing procedure can be implemented in
different ways.
9.5.2 The maximum acceptable price
This approach is particularly useful for setting the price of industrial
products, whose core benefit to the buyer is a cost reduction. To evaluate
what the customer is prepared to pay, the procedure followed is to identify
and evaluate the different satisfactions or services provided by the product
as well as all the costs (other than price) it implies. Thus the procedure is
the following:
•
Understand the total use of the product from the buyer’s point
of view.
•
Analyse the benefits generated by the product.
•
Analyse the costs implied by the acquisition and the use of the
product.
•
Make cost-benefit trade-offs and determine the maximum
acceptable price.
The highest price that the customer will be willing to pay for the
product is given by:
Benefits – Costs other than price = Maximum Acceptable Price
(MAP)
The benefits to consider can be functional (the core service),
operational, financial or personal. Similarly, the costs implied other than
prices are just as diverse, acquisition costs, installation, risk of failure,
custom modification etc.
16
9.5.3.
Price leadership
Price leadership strategy prevails in oligopolistic markets. One
member of the industry, because of its size or command over the market,
emerges as the leader of the industry.
The leading company then makes pricing moves which are duly
acknowledged by other members of the reference market.
Initiating a price increase is typically the role of the industry leader.
The presence of a leader helps to regulate the market and avoid too many
price changes. Oligopolistic markets, in which the number of competitors
is relatively low, favour the presence of a market leader who adopts an
anticipative behaviour and periodically determines prices. Other firms then
recognize the leader’s role and become followers by accepting prices. The
leadership strategy is designed to stave off price wars and ‘predatory’
competition, which tends to force down prices and hurt all competing
firms. There are different types of leadership.
•
Leadership of the dominant firm is the firm with the highest
market share. The dominant firm establishes a price and the
other producers sell their products at this price. The leader
must
be
powerful
and
undisputed
and
must
accept
maintaining a high price.
•
Barometric leadership which consists of initiating desirable
price cuts or price increases, taking into account changes in
production costs or demand growth. In this case the leader
must have access to an effective information system providing
him or her with reliable information on supply and demand,
competition and technological change.
•
Leadership by common accord, where one firm is tacitly
recognized
as
leader,
without
there
being
a
formal
understanding or accord. The latter would in fact be illegal.
Such a leader could be the most visible firm in the sector, for
17
example the firm that leads in technology. It should also have
sensitivity to the price and profit needs of the rest of the
industry.
According to Corey (1991) the effective exercise of leadership
depends on several factors:
The leader must have a superior market information system for
understanding what is going on in the market and reacting in a timely way.
•
It should have a dear sense of strategy.
•
The price leader should use long-term measures to assess
managerial performance.
•
It should want to lead and to act responsibly.
•
It should have a broad concern for the health of the industry.
•
It will tend to behave in a way that preserves short-run market
share stability.
On the whole, the presence of a leader acts as a market stabilizer
and reduces the risk of a price war.
9.5.4 Pricing new products
The more a new product is unique and brings an innovative solution
to the satisfaction of a need, the more delicate it is to price. This price is a
fundamental choice upon which depends the commercial and financial
success of the operation. Once the firm has analyzed costs, demand and
competition, it must then choose between two very contradictory
strategies: (a) a high initial price strategy to skim the high end of the
market, and (b) a strategy of low price from the beginning in order to
achieve fast and powerful market penetration.
18
9.5.5 Skimming pricing strategy
This strategy consists of selling the new product at a high price and
thus limiting oneself to the upper end of the demand curve. This would
ensure significant financial returns soon after the launch. Many
considerations· support this strategy; furthermore, a number of conditions
need to be met for this strategy to prove successful.
•
When there are reasons to believe that the new product
lifecyc1e will be short, or when competition is expected to copy
and to market a similar product in the near future, a
skimming price strategy may be recommended because a low
price strategy would make the innovation unprofitable.
•
When a product is so innovative that the market is expected
to mature slowly and the buyer has no elements on which to
compare it with other products, demand is inelastic. It is
tempting to exploit this situation by setting a high price and
then readjusting it progressively as the market matures.
•
Launching a new product at a high price is one way of
segmenting the mar-ket. The segments have different price
elasticity. The launching price skims the customers who are
insensitive to price. Later price cuts then allow· the firm to
reach successively more elastic segments. This is a form of
time dis-criminatory pricing.
•
When demand is hard to evaluate, it is risky to anticipate what
kind of de-mand growth or cost reduction can result from a
low price. This is particu-larly true when the manufacturing
process is not yet stabilized and costs are likely to be
underestimated.
•
To be effective, the introduction of a new product requires
heavy expenditure on advertising and promotion. When the
firm does not have the financial means necessary for a
19
successful introduction, charging high prices is one way of
generating the resources.
Price Skimming strategy is definitely a cautious strategy which is
more financial than commercial. Its main advantage is that it leaves the
door open for a progressive price adjustment, depending on how the
market and competition develop. From a commercial point of view, it is
always easier to cut a price than to increase it.
9.5.6 Penetration price strategy
Penetration strategy, on the other hand, consists of setting low prices
in order to capture a larger share of the market right from the start. It
assumes the adoption of an intensive distribution system, the use of mass
advertising to develop market receptivity, and especially an adequate
production capacity from the beginning. In this case the outlook is more
commercial than financial. The following general conditions must prevail
to justify its use.
•
Demand must be price elastic over the entire demand curve;
there are no upper segments to be given priority and the only
strategy is to address the whole market at a price low enough
to satisfy the greatest number.
•
It is possible to achieve lower unit costs by increasing volumes
significantly, either because of economies of scale or because
of potential experience effects.
•
Soon after its introduction, the new product is threatened by
strong competition. This threat of new entrants is a powerful
reason for adopting low prices. The penetration strategy is
used here to discourage competitors from entering the market.
Low prices act as very efficient barriers to entry.
•
The top range of the market is already satisfied; in this case,
penetration policy is the only valid policy to develop the
market.
20
•
Potential buyers can easily integrate the new product in their
consumption or production; the transfer costs of adopting the
product other than its price are relatively low and, therefore,
a mass market can be developed rapidly.
A penetration price strategy is therefore more risky than a skimming
price strategy. If the firm plans to make the new product profitable over a
long period, it may face the situation that new entrants might later use
new production techniques which will give them a cost advantage over the
innovating firm.
9.5.7 Product line pricing
Strategic marketing has led firms to adopt segmentation and
diversification strategies which have result in the multiplication of the
number of products sold by the same firm or under the same brand.
Generally a firm has several product lines, and within each product line
there are usually some products that are functional substitutes for each
other and some that are functionally complementary. This strategy of
product development brings about an interdependence between products,
which is reflected either by a substitution effect (or cannibalism) or by a
complementarily effect. Since the objective of the firm is to optimize the
overall outcome of its activities, it is clearly necessary to take this
interdependence into account when determining prices.
When a firm is selling a set of related products, the price of each
product must be set in such a way as to maximize the profit of the entire
product line rather than the profit of a single product. The pricing strategy
adopted will be different according to whether the related products are
complementary to or competitive with each other.
21
9.5.8 Price Bundling
When the products are related but are non-substitutes i.e.
complementary or independent, one strategic option for the firm is optional
price bundling, where the products can be bought separately, but also as
a package offered at a much lower price than the sum of the parts. Because
the products are not substitutes, it is possible to get consumers to buy the
package instead of only one product of the line. This pricing strategy is
common practice, for instance, in the’ automobile and audiovisual
markets, where packages of options are offered with the purchase of a car
or of stereo equipment.
9.5.9 Premium pricing
This pricing strategy applies to different versions of the same
product, a superior version and a basic or standard model. Potential
buyers for the standard model are very price sensitive, while buyers of the
superior model are not. If economies of scale exist, it is unprofitable for the
firm to limit its activity to one of the two market segments. The best
solution is to exploit jointly economies of scale and heterogeneity of
demand by covering the two segments, the lower end of the market with a
low price and the high end with a premium price.
The same pricing strategy can be applied in the service sector by
modifying the service package. For example, airlines have used this pricing
strategy very successfully. Their market consists of both a price-insensitive
business traveller and a very price-sensitive holiday traveller. Business
people place a high value on flexible scheduling. In contrast, holiday
makers generally plan their trips far in advance.
Capitalizing on these differences, airlines set regular ticket prices
high and offer discounts only to buyers who purchase their tickets well
before departure. By offering lower fares only with inflexible schedules,
airlines have been able to price low enough to attract price-sensitive buyers
22
without making unnecessary concessions to those who are less price
sensitive.
9.5.10
Image pricing
A variant of premium pricing is ‘image pricing’. The objective is the
same: to signal quality to uninformed buyers and use the profit made on
the higher priced version to subsidize the price on the lower priced version.
The difference is that there is no real difference between products or
brands; it is only in image or perceptual positioning. This is common
practice in markets like cosmetics, dresses, snacks etc., where the
emotional and/ or social value of a product or a brand is important for the
consumer.
9.6 SUMMARY
Marketing always involves the exchange of products, ideas, and
services of some value. Value, on the part of the marketers, is generally
represented by price. Price plays an important role in the marketing mix to
attain marketing objectives because it is the only ‘P’ of the marketing mix
which generates revenue for a firm. Price enables buyers and sellers to
express the value of the products and services they have to offer. In a good
marketing-mix, all the four Ps must be consistent with each other. For
example, moderate price represents moderate product quality and medium
sized budget for advertisements and product is available in multiple brand
shops whereas high price is consistent with high quality of the product.
In setting prices, it is important to determine the pricing objectives,
knowing the importance of pricing for target market, calculating the
approximate demand, and determining the pricing strategy. Organizational
objectives become the basis for pricing strategies. The price must suit to
the target audience. Marketers must know that how many people will buy
their product and how much it will cost to meet the exact demand. Cost
23
provides the basis on which to build a strategy. There are many strategies
to achieve the firm’s objectives like value pricing, loss-leadership product
line pricing etc.
9.7 KEYWORDS
Value: The power of one product to attract another product in an
exchange.
Barter: The exchange of products without the use of money.
Price competition: The competition which is exclusively based on
price. It is especially in those kinds of products which are similar in nature
and are not distinctive on the basis of their features, such as raw materials.
Non price competition: Competition emphasizing product features
rather than price.
Pricing objectives: The desired result associated with a particular
pricing strategy. For example, Skimming is associated with getting higher
price for a new product.
Product line pricing: When a firm is selling a set of related products,
the price of each product must be set in such a way as to maximize the
profit of the entire product line rather than the profit of a single product.
9.8 SELF ASSESSMENT QUESTIONS
1.
What do you understand by ‘price’ of a product? Discuss the
importance of pricing decisions.
2.
Explain the various objectives which a firm can have while
deciding the price of its products.
24
3.
Discuss the various pricing strategies available to an
organisation.
4.
Write a detailed note on ‘price elasticity’.
9.9 REFERENCES/SUGGESTED READINGS
1.
Marketing Management, Analysis, Planning and Control By
Philip Kotler, Prentice Hall of India, New Delhi.
2.
Marketing Management By Rajan Saxena, Tata McGraw Hill
Publishing Company Ltd., New Delhi.
3.
Marketing
Management-
Planning,
Implementation
and
Control, The Indian Context By Ramaswamy V.S. and
Namakumari S., Macmillan India Ltd., New Delhi.
25
LESSON-10 PROMOTION DECISION: PROMOTION
MIX AND ADVERTISING
STRUCTURE
10.0 Objective
10.1 Introduction promotion mix
10.2 Promotional communication system
10.3 Factors affecting promotion mix
10.4 Elements of promotion mix
10.4.1
Role of Advertising
10.4.2
Types of Advertising
10.4.3
Prerequisites of Effective Advertising
10.5 Developing and managing an advertising program
10.6 Summary
10.7 Keywords
10.8 Self Assessment questions
10.9 References/Suggested readings
10.0 OBJECTIVE
After reading this lesson, you must be able to learn
•
what is the concept of promotion mix;
•
promotional and communication system;
•
what is an advertising communication; • what
parameters
are used in media planning; and
•
How the advertising budget decisions are made.
10.1 INTRODUCTION TO PROMOTION MIX
Promotion includes all those activities which are aimed at creating or
stimulating demand. It has been defined as “the coordination of all seller1
initiated efforts to set up channels of information and persuasion to
facilitate the sale of a good or service, or acceptance of an idea”. Thus,
promotion is a marketing activity which is aimed at informing, persuading
and inducing the customer to buy goods or services. The role of promotion
in marketing mix may be seen in Fig. 1. It shows that promotion is in
tandem with other elements of marketing strategy, viz., product, pricing
and distribution strategies. The marketing manager cannot design his
promotion strategy unless it is decided what products are to be sold, what
is their price and what distribution channels are to be used· for selling.
Once these decisions have been made, he is ready to determine his
advertising, sales promotion, personal selling and publicity programmes for
reaching the target market. Promotion programmes aimed at present and
potential customers result in sales. Sales volume provides feedback for
marketing objectives and marketing strategies including promotion
strategy and indicate the need for adjustments in them for the achievement
of sales targets.
Fig. 1: Promotion as Constituent of Marketing Strategy
The five major promotion tools, called the promotion mix, are
advertising, personal selling, sales promotion, publicity and public
relations. Each of these promotion tools has its own characteristics.
•
Advertising is a unilateral and paid form of non-personal mass
communication by a clearly identified sponsor. Usually it is
2
designed to create a favourable attitude toward the company
or product.
•
Sales promotion includes all short-term incentives, generally
organized on a temporary and for local basis, and designed to
stimulate immediate purchase and to move sales forward more
rapidly than would otherwise occur, and to effect higher
demand.
•
Public relations involve a variety of actions aimed at
establishing a positive corporate image and a climate of
understanding and mutual trust between a firm and its
various publics. Here, the promotion objective is less to gain
moral support from public opinion for the firm’s economic
activities, which ultimately would help the company in
accomplishing its objectives.
•
Personal selling has the objective of organizing a verbal
dialogue with potential and current customers and to deliver a
tailor-made message with the short-term objective of making a
sale. Its role is also to gather information for the firm.
•
Publicity, like advertising, is an impersonal method of
promotion and it is also addressed to groups of audience. It
differs from advertising in the sense that it is not sponsored by
the seller. It is the coverage of commercially significant
information regarding the company and/ or its products is
form of a news item or popular article by the media on its own.
In addition to these traditional promotion tools, one must also add
direct mail, catalogue selling, fairs and exhibitions, telemarketing etc.
Although these means of promotion are very different, they are also highly
complementary. The problem is, therefore, not whether advertising and
sales promotion are necessary, but rather how to allocate the total budget
3
to various promotion tools, given the product’s characteristics and the
chosen communication objectives.
10.2 PROMOTIONAL COMMUNICATION SYSTEM
One of the most important purposes of promotion is to inform and
influence the buyer behaviour. It achieves this purpose through
promotional communication. The marketer informs the potential customer
audience about the product, its distinguishing features, functions, price,
dealer location, etc. The marketer also uses his communication to convince
the potential customers about the product so as to induce them to
purchase it. A model of promotional communication is given in Fig. 2.
Fig. 2: Promotional Communication System
It shows that promotional communication may originate from the
marketing manager of the company manufacturing the product, wholesaler
or dealers, or a combination of them. It may also be in the form of a writeup in a newspaper or magazine such as The Economic Times, Femina, etc.
The customer reaction to promotional message is considerably influenced
by their perceived credibility of the source. This emphasizes the· need of
integrity in advertising, personal selling and other promotional activities.
The communication source sends promotional messages to customer
audience. These messages may be about the functional utility of the
4
product, quality, price, status value, etc. For example, Lipton Tea Co.
focuses on the theme “Tea is warm in winter and cool in summer”. It thus
aims at convincing its customers that tea, though a hot drink is good not
only in winter but also in summer. The Life Insurance Corporation is now
attempting to promote insurance by emphasizing that investment in an
insurance policy is as lucrative as a recurring deposit account in a bank as
it does not attract income tax on the insured amount when received, and
insurance premia are also tax exempted.
The marketer has a number of communication channels available to
him. Important among them are advertisements in newspapers and
magazines, direct mail, hoardings, radio, television, movie strips, facetoface contacts by salesmen, publicity, and sales promotion displays,
discounts premiums, gifts, coupons, etc. Word-of-mouth communication
among consumers is also an effective promotional tool although it is riot
controllable by the marketer. Other elements of marketing such as the
product, packaging, brand name and pricing also inform, influence and
induce the buyers. The marketer generally uses a number of these
communication modes in combination so as to reinforce each other.
Noise or distortion enters the communication system at two stages.
The message intended by the marketer may be distorted or not fully
understood by the media with the result that the actual message
communicated to the audience differs from the intended message. Noise
may also occur in the channel, and at the level of the receiver of the
message. The audience is often subjected to conflicting promotional
messages by competing marketers. There may be noise on the television or
radio, or the advertisement may be so obscured in the newspaper that it is
lost. Another example of noise is distraction of the client due to worry,
anxiety or busy schedule when the salesman is trying to promote the
product, or when he is listening the commercial on the radio.
5
The customer audience reacts to promotional messages received from
various channels. A positive customer response results in present or future
sales. The customers’ response provides feedback to the marketing
manager, who modifies his message and channels with a view to enhancing
their effectiveness.
Conditions for effective communication: Four conditions can be
identified:
•
Communication objectives: Sender must know what audiences
they want to reach and what type of response they want from
them. This implies the choice of ‘a target audience and the
determination of specific communication objectives. These
tasks are typically the responsibilities of strategic marketing
people.
•
Message execution: Communicators must be skilful In
encoding message and able to understand how the target
audience tends to process messages. This involves designing
communication messages and ensuring, through testing, that
they are processed by the target group in the intended manner
to produce the desired communication effect.
•
Media planning: Two decisions are involved here. First, media
selection, i.e. ‘where’ to reach the target audience most
efficiently; second, media scheduling, i.e. ‘how often’ the target
audience needs to be reached to produce the intended
communication objective.
These last two tasks are in general assumed by advertising
agencies and/or by agencies specializing in media planning.
•
Communication effectiveness: The advertiser must identify the
audience’s response to the message and verify as to what
extent the communication objectives have been achieved.
6
Applying the concept of marketing to advertising implies developing
messages that relate to buyers’ experience, namely by adopting a language
they can decode. These four conditions for efficient communication
determine
the
various
decisions
to
be
taken
in
any
marketing
communication programme.
Electronic communication: As a result of the impetus from
developments
in
telematics,
cable
television,
pay-TV,
satellite
communication, interactive videotext terminals, personal computers etc.,
electronic communication is at present in full development. These new
possibilities influence our way of life as well as the promotion strategies of
rums.
The development of electronic communication not only modifies the
respective roles of personal selling and of advertising, but also changes the
objectives and the content of advertising communication. Many significant
changes are already observable in our society.
•
To begin with, the new means of communication tend to be
more interactive, i.e. two-way rather than one-way as in the
past. Today, the general public has the possibility of asking
for, choosing and sending back information rather than simply
being passively subjected to a bombardment of irrelevant
messages. We are
moving in fact
towards demanded
advertising.
•
Furthermore, it is now possible to have access to huge data
banks, in the most varied fields, on available products, their
comparative performance, their prices etc. The firm will,
therefore, face a more and better informed public. Such facts
will further reinforce the informative and factual character of
communication, which will increasingly be set up as an aid to
the buyer rather than as a sales instrument.
7
•
Another consequence of the development of electronic
communication is its greater selectivity. The combination of
possibilities offered by the telephone, the computer and the
television means that very well-defined targets can be reached
with personalized messages. We are, therefore, moving
towards personalized electronic mail systems which would
improve
communication
effectiveness
and
favour
the
development of interactive marketing.
•
Regionalization of radio and television programmes also
favours selectivity of communication. The introduction of local
channels will allow local firms and local advertisers to have
access to radio and television. Media plans could allocate
different degrees of pressure from region to region and thus
better adapt the brand situation from one region to another.
•
Finally, another consequence is that the considerable increase
in geographic zones covered by a transmitting station, thanks
to the use of satellites and cable, will reinforce the
internationalization of brands and advertising campaigns.
Thanks to these developments in the means of communication, a
whole series of tasks once exercised by salespersons could henceforth be
achieved by impersonal means of communication at a lower cost.
Welladdressed direct mail, the telephone, a catalogue that can be consulted
on a TV screen or a computer can all bring more extensive and more precise
information faster than a sales person’s sales speech.
However, the growth of these new communication means doesn’t
imply elimination of the sales person. A personal contact will always be
necessary. Electronic communication completes the action, prepares it and
makes it more productive.
8
10.3 FACTORS AFFECTING PROMOTION MIX
The factors that guide a marketer’s decision in selecting a promotion
mix are:
(a)
Nature of the product: Promotion mix significantly depends
on the nature of the product. For example, industrial goods need a different
kind of promotion than consumer goods. Industrial goods, particularly
plant, machinery and other expensive installations need a heavy emphasis
on personal selling. Advertising and direct mail may perform the
informational role. The buyer wants to know detailed specifications and
uses of the product as well as demonstration of the product which requires
a salesman to do it. Sales of these speciality items also require a
considerable amount of after-sales services.
Consumer goods also sharply differ from one another. Convenience
goods differ from shopping goods and speciality goods. Convenience goods
are typically low-priced items, and are not subject to change in fads and
fashions. The customer has full knowledge of these goods and devotes
minimum effort in buying them. Convenience goods include· groceries,
stationery, etc. Personal selling plays a minor role in promoting the sale of
such ·goods. Heavy emphasis is placed on manufacturers’ advertising and
dealers’ displays.
Shopping goods differ from convenience goods in that the customer
does not possess full knowledge about the product features and uses before
he embarks on buying it. Consumer wants to compare quality, price and
product features of several brands before making the buying decision.
Examples of shopping goods are textiles, furniture, radio, etc. Promotion of
shopping goods requires considerable emphasis on personal selling,
backed up by advertising.
Speciality
goods
are
those
goods
which
possess
“unique
characteristics and/or brand identifying effort”. In the case of speciality
9
goods, the customer possesses full knowledge of the product that he wants
to buy. In this respect, speciality goods resemble convenience goods and
differ from shopping goods. However, in the case of speciality goods, the
customer has special preference for a particular brand. For example, a
customer of cigarettes wants to buy pot any cigarette but a particular brand
of cigarette, say Gold Flake. Thus consumer preference of a specific brand
is a distinctive feature of speciality goods. They, therefore, need heavy
emphasis on advertising for promoting selective demand.
(b)
Nature of the Market: Market characteristics exercise an
important influence in the design of promotion mix. A firm operating in a
small local market generally prefers to concentrate heavily on personal
selling. On the other hand a firm dealing in goods having regional or
national market, has to depend more on advertising.
Another market characteristic influencing the promotion mix
decision is the density of customers. Concentration of one or a few types of
customers in a market area requires a different type of promotion strategy
than the one requires for a market where a variety of customer groups are
found. Moreover, even if a firm has nationwide market, most of its
customers maybe concentrated in a limited number of geographical areas.
For example, automobiles have a national market, but major portions of
trade are concentrated in big cities like Ahmedabad, Bombay, Calcutta,
Indore, Kanpur, etc. As a general rule, it may be held that greater the
density of customers, greater is the scope for personal selling; more
dispersed the customers, more a firm has to rely on advertising.
(c)
Overall marketing strategy: i.e. whether the firm wishes to
“push” the product or create a “pull” for the product. The “push” refers to
selling the product aggressively to the marketing network. In this strategy
the emphasis is on personal selling and trade promotion. But in “the “pull”
strategy the firm creates con1umer demand for its product or brand such
that the customer demands the brand at the retail outlet. Advertising and
10
consumer promotion go a long way in creating the desired pull for the
brand.
(d)
Buyer readiness stage: The choice of different elements of
promotion mix is also dependant on the buyer’s readiness and awareness
of the brand. Depending on where the buyer is in the hierarchy of response
models, promotion mix can be assembled. Like advertising will play a major
role in creating awareness, demonstration and samples will help bring
about a change at the affective and behavioural levels while personal
selling.
(e)
Product life cycle stage: will also playa role in deciding on
the promotion mix. For example, in the introduction stage, advertising and
publicity have a significant role and prove to be cost effective in creating
awareness, desire and finally the trial. Even samples· play a key
promotional role in industrial products. But in the maturity stage, sales
promotion and personal selling help make the product steer through the
competition maze. Thus it is important to know where the product is in its
life cycle.
10.4 ELEMENTS OF PROMOTION MIX
The first and foremost tool of promotion is advertising. In today’s
marketing scenario, it can be easily said that “No advertising, No business”.
Advertising is a means of communication by which a firm can deliver a
message to potential buyers with whom it is not in direct contact. When a
firm resorts to advertising, it is effectively following a pull communication
strategy. Its main objective is to create a brand image and brand equity,
and to ensure cooperation from distributors. Just as the sales force is the
best tool for a push strategy, advertising is the best means for a pull
strategy.
11
10.4.1
•
Role of Advertising
For the firm, the function of advertising is to produce
knowledge for consumers and to generate interest among them
in order to create demand for its product.
•
For consumers, advertising allows them to learn about the
distinctive characteristics claimed by the manufacturer.
Advertising also helps them to save personal time, since the
information reaches them directly without their having to
collect it.
10.4.2
Types of Advertising
Since the advent of the early form of advertising, advertising
communication objectives have diversified considerably, and different
forms of advertising can be identified while using the same media.
(i)
Concept advertising: This is a media advertising message
with a mainly ‘attitudinal’ communication objective: to influence the
buyer’s attitude towards the brand. Its role can be summed up as “The
creative efforts of many national advertisers are designed, not to induce
immediate action, but to build favourable attitudes that will lead to
eventual action i.e. purchase. This definition implies that the effectiveness
of this type of advertising can only by viewed from a longterm perspective.
The notion of attitude holds a central position here. The objective is mainly
to create an image based on communicating a concept”.
(ii)
Promotional advertising: This is a media advertising message
with a mainly ‘behavioural’ communication objective: to influence buyers’
purchasing behaviour rather than their attitudes. The objective is to trigger
the act of purchase. Its effectiveness is evaluated directly in terms of actual
sales. This is the most aggressive type of communication, although it is not
incompatible with image creation. However, its immediate purpose is to
achieve short-term results.
12
(iii)
Response advertising: This is a personalized message of an
offer, having the objective of generating a ‘relationship’ with the prospect
by encouraging a response from the latter on the basis of which a
commercial relation can be built. This type of advertising tries to reconcile
the characteristics of the two previous ones: building an image, but also
encouraging a measurable response allowing an immediate appraisal of the
effectiveness of the communication.
(iv)
Institutional advertising: In the first three styles of
communication, the product or brand is at the heart of the advertising
message. Institutional advertising does not talk about the product, but
aims to create or reinforce a positive attitude towards the firm. The
objective is, therefore, to create an image, but that of the firm: to describe
the firm’s profile and stress its personality in order to create a climate of
confidence and understanding. The purpose is to communicate differently
in a saturated advertising world and to fight against the fatigue of product
advertising with a sorter approach, by drawing attention to the firm itself,
its merits, its values and talents. Clearly, the effectiveness of this kind of
advertising can only be evaluated in the longterm.
10.4.3
Prerequisites of Effective Advertising
There are many firms that tend to assimilate advertising with
marketing and to approach marketing by advertising. In fact, advertising is
only a complement, which is sometimes but not always indispensable, to a
more fundamental process of strategic marketing. For advertising to be
effective, a number of prerequisites should ideally prevail:
Advertising is one element of the marketing mix and its role cannot
be separated from the roles’ of the other marketing instruments. As a
general rule, advertising will be effective only when it is compatible with
and supports other marketing factors such as a differentiated and clearly
13
positioned product, a competitive price, a well-adapted distribution
network.
Advertising is useful to the consumer for complex products having
internal qualities that cannot be discovered by inspection. For experience
goods, such as motor oil and hair conditioner, consumers have lots to gain
from truthful advertising.
To
be
effective,
advertising
should
promote
a
distinctive
characteristic to clearly position the brand in the minds of consumers as
being different from competing brands. The distinctive characteristics can
be the promise of the brand, as also its personality, its design and style or
its prestige value.
Advertising is particularly effective in markets or segments where
primary demand is expansible. Its role is then to stimulate the need for the
product category as a whole. In non-expansible markets, the main role of
advertising is to stimulate selective demand and to create communication
effects at the brand level.
The size of the reference market must be large enough to absorb the
cost of an advertising campaign, and the firm must have enough financial
resources to reach the threshold levels of the advertising response function.
Thus, the advertising communication platform is the complement of
a strategic marketing programme. The advertising positioning sought must
be in line with the marketing positioning adopted and based on a sound
strategic thinking, without which advertising cannot be effective.
10.5 DEVELOPING AND MANAGING AN ADVERTISING PROGRAM
In developing a program, marketing managers must always start by
identifying the target market and buyer motives. Then they can make the
five major decisions in developing an advertising program, known as the
five Ms: (i) Mission: What are the advertising objectives? (ii) Money: How
14
much can be spent? (iii) Message: What message sh6bld be sent? (iv)
Media: What media should be used? (v) Measurement: How should the
results be evaluated? These decisions are described in the following
sections.
(a)
Alternative Advertising Objectives
•
Cognitive response, which relates to awareness and knowledge
of the product characteristics. At this level, the advertiser can
set objectives of information, recall, recognition or familiarity.
•
Affective response, which relates to the overall evaluation of
the brand in terms of feelings, favourable or unfavourable
judgements and preferences. The objectives will be to influence
attitude and to create purchase intention.
•
Behavioural response, which refers to buying behaviour and to
post-purchase behaviour, but also to all other forms of
behavioural
response
observed
as
the
result
of
a
communication, such as visiting a showroom, requesting a
catalogue, sending a reply coupon.
Creating Brand Awareness: This is the first level of cognitive
response. We define brand awareness as the buyer’s ability to identify a
brand in sufficient detail to propose, choose or use a brand. Three kinds of
advertising objective, based on awareness, can be identified:
•
To create or maintain brand recognition so that buyers identify
the brand at the point of sale and are induced to check the
existence of a category need.
•
To create or maintain brand recall to induce buyers to select
the brand once the category need has been experienced.
•
To emphasize both brand recognition and brand recall.
These communication objectives imply different advertising contents.
For brand recognition, the advertising content will emphasize the visual
15
elements (logo, colours, packaging), while for brand recall the advertising
will seek to repeat the brand name in audio and visual media and in
headlines and to associate the brand name with the core service.
Creating a favourable brand attitude: The objective is to create,
improve, maintain and modify buyers’ attitudes towards the brand. It is,
therefore, affective response which intervenes here. The following
communication strategies are open to the advertiser:
•
To convince the target audience to give more importance to a
particular product attribute on which the brand is well placed
in comparison to rival brands.
•
To convince the target audience of the firm’s technological
superiority in the product category.
•
To reinforce beliefs and the conviction of the target audience
on the presence of a determining attribute in the brand.
•
To reposition the brand by associating its use with another set
of needs or purchase motives.
•
To eliminate a negative attitude by associating the brand with
a set of positive values.
•
To call attention to neglected attributes by consumers in their
decision-making process.
•
To alter the beliefs of the target audience about competing
brands.
It is important to identify clearly the implicit assumptions of a
communication strategy based on brand attitude. They can be summarized
as follows:
•
The advertiser must emphasize the features or attributes in
which it has the strongest competitive advantage.
•
It is useless to try to modify buyers’ perceptions when the
brand does not really have the claimed characteristic.
16
•
Adopt arguments or themes which are related to product
attributes important to the buyer.
In other words, a market-driven communication strategy is based on
the idea that advertising is mainly designed to help the buyer buy and not
simply praise the advertiser. This vision of a communication strategy falls
well in line with the modern marketing concept.
DAGMAR Approach: Many specific communication and sales
objectives can be assigned to advertising. Colley lists 52 possible
advertising objectives in his Defining Advertising Goals for Measured
Advertising Results. He outlines a method called DAGMAR (after the book’s
title) for turning objectives into specific measurable goals. An advertising
goal (or objective) is a specific communication task and achievement level
to be accomplished with a specific audience in a specific period of time.
Advertising objectives can be classified according to whether their
aim is to inform, persuade, or remind.
•
Informative advertising figures heavily in the pioneering stage
of a product category, where the objective is to build primary
demand.
•
Persuasive advertising becomes important in the competitive
stage, where a company’s objective is to build selective demand
for its brands. Some persuasive advertising uses comparative
advertising, which makes an explicit comparison of the
attributes of two or more brands and tries to reveal its brands
superiority vis-a-vis competing brands.
•
Reminder advertising is important with mature products. A
related form of advertising is reinforcement advertising, which
seeks to assure current purchasers that they have made the
right choice. Automobile ads often depict satisfied customers
enjoying special features of their new car.
17
The advertising objective should emerge from a thorough analysis of
the current marketing situation. If the product class is mature, the
company is the market leader, and brand usage is low, the proper objective
should be to stimulate more usage. If the product class is new, the company
is not the market leader, but the brand is superior to the leader, then the
proper objective is to convince the market of the brand’s superiority.
(b)
Advertising Message
Advertisers go through four steps to develop a creative message:
message generation, message evaluation and selection, message execution,
and social responsibility review.
Message Generation: Consumers are not interested in products; they
are interested in solutions to their problems. So the ‘solution’ or the benefit
has to be the pivot of the message. The product’s “benefit” message should
be decided as part of developing the product concept. Yet there is usually
latitude for a number of possible messages. Over the time, the marketer
might want to change the message, especially if consumers seek new or
different benefits from the product.
Creative people use several methods to generate possible advertising
appeals. Many creative people proceed inductively by talking to consumers,
dealers, experts, and competitors. Some creative people use a deductive
framework for generating advertising messages. Maloney saw buyers as
expecting one of four types of reward from a product: rational, sensory,
social, or ego satisfaction. Buyers might visualize these rewards from
results-of-use experience, product-in-use experience, or incidental-to-use
experience. Crossing the four types of rewards with the three types of
experience generates twelve types of advertising messages. For example,
the ·appeal “gets clothes cleaner” is a rational-reward promise following
results-of-use experience.
18
Message evaluation and selection: A good advertisement normally
focuses on one core selling proposition. Twedt suggested that messages be
rated on desirability, exclusiveness, and believability.
•
Desirability: the message must first say something desirable
or interesting (which is valuable to the customer) about the
product.
•
Exclusiveness: the message must say something exclusive that
does not apply to every brand in the product category.
•
Believability: the message must be believable or provable; at
stake here is the credibility of the message sender.
The advertiser should conduct market research to determine which
appeal works best with its target audience.
Message execution: The message’s impact depends not only upon
‘what’ is said but also on ‘how’ it is said. Some ads aim for rational
positioning and others for emotional positioning. In preparing an ad
campaign, the advertiser usually prepares a copy strategy statement
describing the objective, content, support, and tone of the desired ad.
Creative people must also find a cohesive style, tone, words, and format for
executing the message. The communicator must choose an appropriate
tone for the ad. Memorable and attention-getting words must be found.
Creativity is especially required for headlines. There are six basic
types of headlines: news (“New Boom and More inflation Ahead ... and What
You Can Do About It”); question (“Have you Had It Lately?”); narrative
(“They Laughed When I Sat Down at the Piano, but Then I Started to Play!”);
command (“Don’t Buy Until You Try All Three”); 1-2-3 ways (“12 Ways to
Save on Your Income Tax”); and how-what-why (“Why They Can’t Stop
Buying”).
Format elements such as ad size, colour, and illustration will affect
an ad’s impact as well as its cost. A minor rearrangement of mechanical
19
elements can improve attention-getting power. Larger-size ads gain more
attention, though not necessarily by as much as their difference in cost.
Four-colour illustrations increase ad effectiveness and ad cost. By planning
the relative dominance of different elements, better- delivery can be
achieved. New electronic eye movement studies show that consumers can
be led through an ad by strategic placement of dominant elements.
A number of researchers into print advertisements report that the
picture, headline, and copy are important, in that order. The reader first
notices the picture, and it must be strong enough to draw attention. Then
the headline must propel the person to read the copy. The copy itself must
be well composed.
Social responsibility Review: Advertisers and their agencies must
ensure that their advertising message doesn’t overstep social and legal
norms. Most marketers work hard to communicate openly and honestly
with consumers. Still, abuses occur, and public policy makers have
developed a substantial body of laws and regulations to govern advertising.
Companies must avoid false or deceptive advertising. Advertisers must not
make false claims, such as stating that a product cures something when it
does not. It is illegal in India to create ads that deceive, even though no one
may actually be deceived. To be socially responsible, advertisers must be
careful not to offend ethnic groups, racial minorities, or special-interest
groups.
(c)
Media Planning
Having defined the target, message content and the expected
response, the advertiser must choose the best combination of media
support that will allow it to achieve the desired number of exposures to the
target within the limits imposed by the advertising budget. Table 1 shows
the definition of the important terms used in the field of media planning.
Different strategies of how: to use the media can be envisaged.
20
TABLE 1: DEFINITION OF THE PARAMETERS USED
IN MEDIA PLANNING
Target
The specific group of prospects to be reached.
Circulation
The number of physical units through which advertising
is distributed.
Audience
The number of people who are exposed to a particular
vehicle.
Effective
audience
The number of people with the target’s characteristics who
are exposed to the vehicle.
Exposure
The ‘opportunity to see’ (OTS) or opportunity to hear
(OTH) the message, which does not imply that the person
actually sees or hears the advertisement.
Reach
The number of different persons or households exposed
to a particular medium vehicle at least once during a
specified period of time.
Frequency
The number of times within a specified period of time that
a prospect is exposed to the message.
Gross
Equal to reach multiplied by frequency and measures the
total number of exposures (weight).
rating
point (GRP)
Impact
The qualitative value of an exposure through a given
medium.
The first alternative opposes the two objectives of (reach’ and
‘frequency’: adopting an extensive campaign with a view to reaching the
greatest number of people through maximum reach, or, on the contrary,
adopting an intensive campaign to reach, as emphatically as possible, a
restricted target through maximum frequency or repetition.
Generally, a higher degree of reach is necessary when launching a
new product or starting an ambitious programme of promotion. On the
other hand, a higher degree of frequency is required when the message is
21
complex, the product frequently bought and brand loyalty low. However,
too much repetition is useless, as it may cause irritation or boredom.
The second strategic option is between ‘continuity’ as opposed to
‘intermittence’ in advertising: seeking continuity of advertising efforts over
time to overcome the forgetting rate, stimulate repeated purchases, oppose
rivals’ efforts etc., or, on the contrary, seeking intermittence (pulsing) so as
to optimize consumer learning or reinforcement, or to ‘stretch budgets’ to
coincide with consumption patterns.
The problem is to decide how to schedule advertising, but there is no
clear answer to it. It is important to take into account the nature of the
product, its purchase frequency, seasonality in sales, rivals’ strategies and
the distribution of memory overtime. The fact that the life of a message is
a function of its communication quality renders the problem even more
complicated.
Finally, the third strategic choice is between media ‘concentration’ or
media ‘diversification’ seeking diversification in various types of media so
as to enjoy complementarities between them, obtain a better net reach, a
better geographical allocation etc., or, on the contrary, concentration on a
single medium, so as to dominate the medium best suited to the target, to
personalize the campaign and the product and to benefit from economies
of scale and discounts.
All depends on the adopted segmentation strategy. Diversification is
desirable if the firm follows undifferentiated marketing; if, on the contrary,
it follows a market niche strategy, then it is probably more effective to
concentrate on a single medium.
Criteria for Media Selection: Media selection is guided by
quantitative and qualitative criteria which are listed below. Among
quantitative criteria, the following are important:
22
•
Compatibility of message with medium: The execution of
message may call for or prohibit use of a specific medium.
e.g. an auto manufacturer having strong acceleration would
have to go in for TV advertising.
•
Target audience media habits, i.e. the proportion of the target
group that can be reached through the medium.
•
The stability of the reach over time, for instance from one week
to another or from one season to another.
•
The possibility of having frequent exposure to the message.
•
The medium selectivity in terms of socio-demographic or life
style profiles.
•
The cost per thousand persons reached, which is a function of
the vehicle audience and of the medium cost.
Qualitative criteria of media selection must complement the
quantitative ones. The following can be noted in particular:
•
Audience attention probability, which is, for instance, very
high for cinemas and very low for outdoor advertising.
•
The duration of the message’s life, i.e. the period during which
the message can be perceived.
•
The editorial quality of the vehicle, i.e. its prestige and
credibility.
•
The technical quality of the medium, for instance, the use of
colour, the quality of sound or of images etc.
•
The degree of advertising saturation of the vehicle and the
presence of competitive advertising.
The final choice is concretized in a media plan describing budget
allocation between the different media. Once one has chosen the media,
the next decision is to select the specific vehicles to advertise within the
media. Although the choices are complex and numerous, a number of paid
research services in media and vehicles selection provide data to help the
23
decision-maker. The latter choice is now increasingly made using computer
models of vehicle selection.
(d)
Advertising Budget Decisions
Conceptually, advertising budget decisions can be analyzed using
marginal rules of economic theory. Expenditure on each method of
communication is increased until any further increase reduces profits.
Similarly, the allocation of total budget between different methods is such
that each instrument is used to the level where all marginal revenues are
equal.
(I) Cost-oriented advertising budgets: The cost-oriented budgets
are calculated on the basis of cost considerations, without explicitly taking
demand considerations into account. There are three types of cost-oriented
budget: affordable, break-even and percentage of sales budgeting methods.
(i)
Affordable budget: The budget is directly linked to the short-
term financial possibilities of the company. Advertising will be appropriated
after all other unavoidable investments and expenses have been allocated.
As soon as things go badly, this budget can be eliminated, and if cash is
abundant then it can be spent. The fiscal system also encourages this type
of practice, since increased advertising expenditure reduces taxable profit.
This is not a method as such, but rather a state of mind reflecting an
absence of definite advertising objectives.
(ii)
Break-even Budget: The break-even budget method is based
on the analysis of advertising’s profitability threshold. The absolute
increase in unit sales and in turnover necessary to recoup the incremental
increase in advertising expenditures
For instance, if the gross profit margin is Rs. 60, or 30 per cent of the
unit price, the absolute increase in unit sales to recoup a Rs. 1.5 million
24
advertising budget will be 15,00,000/60 = 25000 units and the breakeven turnover
15,00,000/0.30 = Rs. 50,00,000
(iii)
The percentage of sales budget: The percentage of sales budget
method is used frequently and” treats advertising as a cost. In its simplest
form the method is based on a fixed percentage of the previous year’s sales.
One advantage of this procedure is that expenditures are directly related
to funds available. Another advantage is its relative simplicity.
Although this method is quite popular, it can easi1y be criticized as
it inverts the direction of causality between advertising and sales. Relating
advertising appropriation of anticipated sales makes more sense, because
it recognizes that advertising precedes rather than follows sales. Moreover,
this approach can lead to absurd situations: reducing the advertising
budget when a downturn in sales is predicted, and increasing it when
turnover is growing, with the risk of overshooting the saturation threshold.
In practices, however, it seems that this method is mainly used by
managements with the objective of controlling total advertising expenditure
at the consolidated level of turnover, in order to keep an eye on total
marketing expenditures or to compare with competitors. More refined
methods are used when deciding on advertising at the brand level.
Cost-oriented advertising budgets are only the first stage of the
process of determining the advertising budget. They enable the firm to
define the problem in terms of financial resources, production capacity and
profitability. As for the determination of prices, these methods must be
completed with an analysis of market attitudinal and behavioural
responses.
(II) Communication-oriented advertising budgets: This approach,
also called the ‘task and objective’ method, is the one most widely used. It
25
emphasizes communication objectives and the means necessary to reach
them. Two methods can~ adopted: one based on ‘contact’, defined in terms
of reach and frequency, and one based on ‘perception’.
(i)
Task and objective budgeting: The method starts either with an
objective of reach and frequency for which a budget is calculated, or with
a budget constraint for which the best combination of reach and frequency
is sought to maximize total exposure. By trying to maximize exposure, this
approach places the emphasis on the first level of advertising effectiveness,
i.e. communication effectiveness, while clearly linking the communication
objectives to costs.
(ii)
Perceptual impact budgeting: Perceptual impact budgeting is
based on psycho-sociological communication objectives. To achieve these
objectives, conditions are defined in terms of the means used (media,
reach, repetitions, perceptions etc.). Next, the cost of the various activities
is calculated and the total determines the necessary budget. What is
sought here is an impact on one of the three components of attitude
(cognitive, affective or behavioural).
This method is very demanding, but it has the advantage of requiring
management and advertising people to spell out their assumptions about
the relationships between money spent, exposure, perceptions, trial and
repeat purchase.
Communication-oriented advertising budgets constitute the second
stage of the process of determining the advertising budget. They are in fact
an initial way of explicitly taking into account market response. Because it
is mainly based on intermediary objectives of communication, the
advantage of the method is the emphasis it places on results directly
attributable to advertising, and the fact that it allows the advertiser to
control the advertising agency’s effectiveness.
26
The limitations of these methods are that there is no necessarily any
link between achieving the intermediate communicational objective and the
final goal of improving sales. One cannot therefore view measures of
communicational effectiveness as substitutes for direct measures linking
advertising to sale or market share.
(e)
Measuring Advertising effectiveness
The marketing manager is deeply interested in knowing how far his
advertising has succeeded in achieving its objectives. He needs to evaluate
the effectiveness of advertising for three purposes: (i) To improve the
effectiveness of advertising by making changes in advertising message,
media, timing, etc. Such an evaluation provides him invaluable guidance
in planning the optimum media mix. (ii) To convince management about
the instrumentality of advertising in improving the firm’s profitability so as
to get the required level of budget appropriation for advertising. (iii) To
determine the optimum level of advertising expenditure.
Measurement of advertising effectiveness has turned out to be an
extremely complex and challenging task. Sales are the result of such a large
number of variables including the product, price, distribution channels,
advertising, personal selling, etc., that it is impossible to determine what
proportion of it is due to effective advertising. However, marketing
researchers have developed some tools for measuring the communication
as well as sales effectiveness of advertising.
Measures used for measuring advertising effectiveness: A
number of tests have been developed for measuring the communication
effectiveness of advertising. It is generally assumed that there is a positive
relationship between communication and sales effect of advertising but it
is not known how strong is that relationship.
Recall tests: Recall tests of measuring advertising effectiveness are
aimed at determining how many people saw or heard the advertisement
27
and how many of them remember it. The respondents are shown some or
all of the previously run advertisements, and they are asked what part of it
they remembered and could they recall its sponsor. The assumption
underlying this test is that larger the number of people who remember the
advertisement, the larger the number of people who will buy the product.
Recall tests are also called rectgniti9n, readership and viewership tests.
Response
Tests:
Both
consumer
and
industrial
product
advertisements sometimes include a response coupon urging the reader to
place order or seek more information. Television and radio commercials
similarly urge the viewers/listeners to respond at the specified address or
telephone number. Effectiveness of such advertisements is measured in
terms of responses received.
Attitude and Opinion Tests: A number of tests have been devised for
measuring the impact of advertising in modifying the attitude or opinion of
potential customers. Axelord has listed the following tests of this nature.
The Lottery Measure: The respondents are asked which brand in the
product class would they prefer to have if they were to win a lottery.
The Rating Scale: The respondents are given a rating scale for
indicating the degree of their like or dislike for the advertiser’s brand.
The Predisposition-to-Buy Scale: The respondents are asked to
indicate their brand preference by choosing one of the statements provided
to them. These statements read something like this: I will surely buy X
brand; I will never buy X brand.
The Constant Sum Scale: The respondents are given a list including
the advertiser’s brand and its competing brands. There is a pocket beside
each brand name. Respondents are asked to distribute cards in these
pockets to indicate the likelihood of their purchase of the brand concerned.
A respondent may put several or no cards in front of any brand.
28
Paired Comparison: The respondents are given advertiser’s brand
along with its two competitive brands at a time. They have to indicate their
preferred brand from each pair until they arrive at their most preferred
brand.
Forced Switching: This method is similar to lottery method with the
only difference that the respondents are asked to indicate that if they win
the lottery, what brand except their regular brand, they would prefer to
receive as a gift.
Advertising Recall: The respondents are asked to recall what
advertisements they have read, seen, or heard during the past three
months.
First and Second Choice: The respondents are asked to indicate the
brand they would buy if they were to go shopping immediately. Then they
are asked that if their preferred brand was not available, what other brand
they would buy.
Awareness: The respondents are asked to tell the brands of the
advertiser’s product class.
Buying Game: The respondents are given a number of cards with
each card describing a unique shopping situation they might possibly
encounter if they went out shopping. They are asked to indicate the brand
they would buy in each of these situations.
Measurement or Sales Effectiveness of Advertising: Advertising
effectiveness measures discussed above focus on its communication
effectiveness, and not on sales effectiveness. But these two are not the same
thing. It is possible that an advertisement may succeed in creating brand
awareness and recognition, yet fail to stimulate sales. It is extremely
difficult to measure the sales effectiveness of advertising as sales are
caused by a number of variables which cannot be separated for analysis
29
and research. However, two approaches are often used to measure the sales
generation effect of advertising. In the historical approach, the researcher
tries to find the relationship between the past sales data and advertising
expenditure during the corresponding period. Experimental approach
involves field testing. A company may vary its advertising expenditure,
media or message in two or three different geographical regions, and then
study the relationship between sales and advertising variable under
investigation. This is, however, a crude measure as the regions selected for
study may differ in sales potential, competitors’ marketing strategy, etc.
But in the absence of more sophisticated tools of research, it may be used
as a possible guideline in the formulation of advertising strategy.
10.7 SUMMARY
Promotion includes all those activities which are aimed at creating or
stimulating demand. It has been defined as “the coordination of all sellerinitiated efforts to set up channels of information and persuasion to
facilitate the sale of a good or service, or acceptance of an idea”. Thus,
promotion is a marketing activity which is aimed at informing, persuading
and inducing the customer to buy goods or services. The marketing
manager cannot design his promotion strategy unless it is decided what
products are to be sold, what is their price and what distribution channels
are to be used· for selling. Once these decisions have been made, he is ready
to determine his advertising, sales promotion, personal selling and
publicity programmes for reaching the target market.
There are five major promotion tools known as the promotion mix
which include advertising, personal selling, sales promotion, publicity and
public relations. Each of these promotion tools has its own characteristics.
Advertising is a unilateral and paid form of non-personal mass
communication by a clearly identified sponsor. Usually it is designed to
create a favourable attitude toward the company or product. Sales
30
promotion includes all short-term incentives, generally organized on a
temporary and for local basis, and designed to stimulate immediate
purchase and to move sales forward more rapidly than would otherwise
occur, and to effect higher demand. Public relations involve a variety of
actions aimed at establishing a positive corporate image and a climate of
understanding and mutual trust between a firm and its various publics.
Here, the promotion objective is less to gain moral support from public
opinion for the firm’s economic activities, which ultimately would help the
company in accomplishing its objectives. Personal selling has the objective
of organizing a verbal dialogue with potential and current customers and
to deliver a tailor-made message with the short-term objective of making a
sale. Its role is also to gather information for the firm. Publicity, like
advertising, is an impersonal method of promotion and it is also addressed
to groups of audience. It differs from advertising in the sense that it is not
sponsored by the seller. It is the coverage of commercially significant
information regarding the company and/ or its products is form of a news
item or popular article by the media on its own.
10.6 KEYWORDS
Advertising
exposure:
Advertising
exposure
of
a
particular
communication contains two factors: cover/reach and frequency. Cover or
reach, is the percentage of a particular target audience reached by a
medium and the frequency is the number of times a particular target
audience has an opportunity to see/hear a message.
Wearout: Advertising beyond a particular point may lead to a
negative response i.e. wearout.
Advertising appeal: The central idea or theme of an advertising
message.
Copy: The words contained in an advertisement.
31
Media selection strategy: Plan for determining which media are
most appropriate for an advertising campaign.
DAGMAR: Defining advertising goals for measuring advertising
results.
10.7 SELF ASSESSMENT QUESTIONS
1.
What are the different tools of promotion mix? Describe the
factors affecting promotion mix decisions.
2.
Explain the different types of advertisements.
3.
Discuss
the
key
stages
of
measuring
advertising effectiveness.
4.
Explain the different methods of making advertising budget
decisions.
10.8 REFERENCES/SUGGESTED READINGS
1.
Marketing Management, Analysis, Planning and Control By
Philip Kotler, Prentice Hall of India, New Delhi.
2.
Marketing Management By Rajan Saxena, Tata McGraw Hill
Publishing Company Ltd., New Delhi.
3.
Marketing
Management-
Planning,
Implementation
and
Control, The Indian Context By Ramaswamy V.S. and
Namakumari S., Macmillan India Ltd., New Delhi.
4.
Advertising Management By Aakar, David & A. Batra,
Prentice Hall, New Jersey.
5.
The Process and Effects of Mass Communication by Wilbur
Schranun and Donald F. Roberts, University of Illinois’s Press.
32
33
LESSON-11
SALES PROMOTION, PERSONAL SELLING
AND PUBLICITY
STRUCTURE
11.0 Objective
11.1 Meaning and definitions
11.2 Nature of each promotional tool
11.3 Personal Selling
11.3.1 Hurdles for personal selling
11.3.2 Types of personal selling
11.3.3 Types of sales jobs
11.3.4 The personal selling process
11.3.5 Changing patterns in personal selling
11.4 Sales Promotion
11.4.1 Objectives of Sales Promotion
11.5 Major Consumer Promotion Tools
11.5.1 Major Trade-promotion Tools
11.5.2 Major Business-promotion tools
11.6 Developing the sales-promotion program
11.7 Implementing and controlling the program
11.8 Evaluating the sales-promotion program
11.9 Public relations
11.9.1 Marketing Public Relation as Publicity
11.9.2 Objectives of Public Relations and Publicity
11.9.3 Major tools of Public Relations and Publicity
11.10 Summary
11.11 Keywords
11.12 Self assessment questions
1
11.13 References/Suggested Readings
11.0 OBJECTIVE
This chapter focuses on the different elements that make up the
promotion mix- sales promotion, present selling and publicity.
11.1 MEANING AND DEFINITIONS
Modem marketing calls for more than developing a good product,
pricing it attractively, and making it available to target customers. It
requires promotion of goods and services in order to succeed in the market
place. Promotion is the element in an organisation’s marketing mix that
serves to inform, persuade, and remind the market of a product and/or the
organisation selling it, in the hope of influencing the recipients’ feelings,
beliefs, or behaviour.
What is communicated, however, should not be left to chance. To
communicate effectively, companies hire advertising agencies to develop
effective
advertisements;
sales-promotion
specialists
to
design
buyingincentive programs; direct marketing specialists to build databases
and interact with customers and prospects by mail and telephone; and
public relations firms to do product publicity and develop the corporate
image. They train their salespeople to be friendly and knowledgeable. For
most companies, the question is not whether to communicate but rather
what to communicate, how to say, to whom, and how often.
Promotion is a term taken from a Latin word ‘Promovere’, which
means moving from one end to another. In marketing, promotion means
all those tools that a marketer uses to make his product known to the
customers and hence, involves advertising, sales promotion, personal
selling, and publicity etc. The marketing promotion mix (also called the
promotion mix) consisting of five major tools are as follows:
2
(i)
Advertising: Any paid form of non-personal presentation and
promotion of ideas, goods, or services by an identified sponsor.
(ii)
Direct Marketing: Use of mail, telephone, net, and other
nonpersonal contact tools to communicate with customers
and prospects so as to solicit a specific response.
(iii)
Sales promotion: Short-term incentives to encourage trial or
purchase of a product or service.
(iv)
Public Relations and Publicity: A variety of programmes
designed to promote and/or protect a company’s image or its
individual products.
(v)
Personal Selling: Face-to-face interaction with one or more
prospective purchasers for the purpose of making sales.
TABLE 1: COMMON COMMUNICATION/PROMOTION TOOLS
Advertising
Sales promotion
•
Print &
broadcast
•
Contests, games
lotteries
•
Outer
packaging
•
Premiums &
gifts
Packaging
insertions
•
Samples
•
Motion
pictures
Brochures
booklets
•
•
•
•
Posters &
leaflets
•
Director-es
•
Billboards
•
Display
signs
•
Point of
purchase
displays
•
Symbols &
logos
Public relations
Personal selling
•
Press kits
•
Speeches
•
Seminars
•
Annual
reports
Exhibits
•
Donations
•
Demonstrations
•
Sponsorships
•
Samples
•
Coupons
•
Publications
•
•
Rebates
•
Lobbying
Fairs &
trade shows
•
Tie-ins
•
Events
•
Low interest
financing
•
Company
magazines
•
Trade-in
allowance
3
•
Sales
presentatio
ns
•
Sales
meetings
•
Incentive
programs
Direct marketing
•
Catalogue
•
Mailings
•
Telemarketing
•
Electronic
shopping
•
TV shopping
Table 1 lists numerous specific tools that fall within these categories.
Communication, however, goes beyond these specific promotion tools. The
product’s styling, its price, the package’s shape and colour, the
salesperson’s manner and dress, the place of business, the company’s
stationery– all communicate something to the buyers. The whole marketing
mix, not just the promotional mix, must be orchestrated for maximum
communication impact.
11.2 NATURE OF EACH PROMOTIONAL TOOL
Each promotional tool has its own unique characteristics and costs.
Marketers have to understand these characteristics in order to utilise these
effectively.
(a) Advertising: As there are many forms and uses of advertising, it
is difficult to make all embracing generalizations about its distinctive
qualities as a component of the promotional mix. Yet the following qualities
can be noticed:
Public Presentation: Advertising is a highly public mode of
communication. Its public nature confers a kind of legitimacy on the
product and also suggests a standardized offering. Because many persons
receive the same message, buyers know that their motives for purchasing
the product will be publicly understood.
Pervasiveness: Advertising is so pervasive that you can communicate
with any group of target customers across the globe. No nook and comer
of the world go untouched by advertising.
Repeatability: The advertising massage can be repeated and, in fact,
are
repeated
so
that
every
prospective
customer
is
exposed
to
advertisement. Moreover a single exposure is not enough to create the
desired impact.
4
Amplified Expressiveness: Advertising provides opportunities for
dramatizing the company and its products through the artful use of print,
sound, and colour. Sometimes, however, the tool’s very success at
expressiveness may dilute or distract from the message.
Impersonality: Advertising can not be as compelling as company
sales representatives. The audience does not feel obligated to pay attention
or respond. Advertising is able to carry on only a monologue, not a
dialogue, with the audience.
Advertising can be used to build up a long-term image for a product
and on the· other hand it is used to trigger quick sales. Advertising is an
efficient way to reach numerous geographically dispersed buyers at a low
cost per exposure.
(b)
Sales Promotion: Although sales promotion tools- coupons,
contests, premiums, and the like- are highly diverse, they have three
distinctive characters:
Communications:
They
gain
attention
and
usually
provide
information that may lead the consumer to the product.
Incentive: They incorporate some concession, inducement, or
contribution that gives value to the consumer.
Invitation: They include a distinct invitation to engage in the
transaction now.
Companies use sales-promotion tools to create a stronger and
quicker response. Sales promotion can be used to dramatize product offers
and to boost sagging sales. Sales-promotion effects are usually short run
and not effective in building long-run brand preference.
5
(c)
Direct Marketing: Although direct marketing has several
forms- direct mail, telemarketing, electronic marketing, and so on- it has
a few distinctive characteristics:
Non-public: The message is normally addressed to a specific person
and does not reach others.
Customized: The message can be customized to appeal to the
addressed individual.
Up-to-date: A message can be prepared very quickly for delivery to an
individual.
(d)
Public Relations and Publicity: The appeal of public
relations and publicity is based on its three distinctive qualities:
High credibility: News stories and lectures seem more authentic and
credible to audience than ads do as they perceive the information from an
impartial source rather than from brand sponsor.
Off guard: Publicity can reach many prospects who might avoid
salespeople and’ advertisements. The message gets to the buyers as news
item or article rather than as a sales-directed communication.
Dramatization: Public relations has, like advertising, a potential for
dramatizing a company or product.
Marketers tend to under-use public relations or use it as an
afterthought. Yet, a well thought out public relations programme
integrated with the other promotion-mix elements can be extremely
effective. In China, where there is limited advertising space, exorbitant
rates, and tight government control on ad content, companies are
increasingly turning to public relations, particularly sponsorship, to create
brand awareness.
6
(e) Personal Selling: Personal selling is the most cost-effective tool
at the later stages of the buying process, particularly in translating buyers’
preference and conviction into action. The reason is that personal selling,
when compared with advertising, has three distinctive qualities:
Personal Confrontation: Personal selling involves an alive, immediate,
and interactive relationship between two or more persons. Each party is
able to observe each other’s needs and characteristics closely and make
immediate adjustments.
Cultivation: Personal selling permits all kinds of relationships to
spring up, ranging from a matter-of-fact selling relationship to a deep
personal friendship. Effective sales representatives will normally keep their
customers’ interests at heart if they want long-term relationship.
Response: Personal selling makes the buyer feel under some
obligation for having listened to the sales talk. The buyer has a greater
need to attend and respond, even if the response is a polite ‘thank you.’
These distinctive qualities come at a cost. A sales-force represents a
greater long-term cost commitment than advertising. Advertising can be
turned on and off, but the size of a sales-force is more difficult to alter.
11.3 PERSONAL SELLING
Personal selling can make a strong contribution in consumer goods
marketing. Some consumer marketers play down the role of the salesforce,
using them mainly to collect weekly orders from dealers and to see that
sufficient stock is on the shelf. The common feeling is that “salespeople put
products on shelves and advertising takes them off.” Although personal
selling is useful for almost every product or service, it is particularly
important when:
•
The market is concentrated either geographically or in a few
industries, or in a few large customers.
7
•
The product has a high unit value, is quite technical in nature,
or requires a demonstration.
•
The product requires to be customised for each individual
customer, as in the case of securities or insurance.
•
The product is in the introductory stage of its life cycle.
•
The organization does not have enough money for an adequate
advertising campaign.
•
Personal Selling can usually be focused or pinpointed on
prospective customers, thus, minimising wasted effort.
•
The goal of personal selling is to actually make a sale. Other
forms of promotion are designed to move a prospect closer to
a sale.
11.3.1 Hurdles for personal selling
Although personal selling is very essential for any company but there
are certain limitations like:
•
A high cost involvement is a major limitation even though
personal selling can minimise wasted effort, the cost of
developing and operating a sales force is high.
•
The company is often unable to attract the quality of people
needed to do the job. At the retail level, many firms have
abandoned their sales forces and shifted to self-service selling
for this very reason.
11.3.2 Types of personal selling
There are two major kinds of Personal Selling:
1.
Across the counter selling.
2.
Outside sales force.
Across the counter selling is one where the customers come to the
sales people. It primarily involves retail-store selling. In this kind of selling,
8
those sales people are also included who are with catalogue retailers who
take telephone orders. The other kind of personal selling is where sales
people go to the customers. These people sell in person at a customer’s
place of business or home.
11.3.3 Types of sales jobs
The types of selling jobs and the activities involved in them cover a
wide range. People who sell are, called by various names: salesmen, sales
representatives, salespersons, account executives, sales consultants, sales
engineers, field representatives, agents, and marketing representatives.
Given below is the classification of sales jobs by Robert Mcmurry:
(a)
Driver sales person (Deliverer)- In this, the sales person
primarily delivers the product. For example, soft drinks, bread and milk
salesman who deliver the respective products to retailers and/or other
customers. In these types of jobs selling responsibilities are secondary.
Few of these salesmen originate sales.
(b)
Inside order taker- This is a position in which the sales person
takes orders at the seller’s place of business. Most of the sales persons visit
grocery shops and general stores to take orders for various items.
(c)
Outside order taker- In this position the sales person goes to
the customer in the field and accepts an order. Most of the sales person
who takes orders by visiting various colonies and residential localities fall
in this type of category.
(d)
Missionary sales person- This type of sales job is extended to
build goodwill, perform promotional activities, and provide information and
other services for the customers. This sales person is not expected to solicit
an order. Medical representatives calling on doctors fall in this category.
9
(e)
Sales engineer (Technician)- In this position the major
emphasis is on the sales person’s ability to explain the product to a
prospective customer, and also to adapt the product to the customer’s
particular needs. The products involved here typically are complex,
technically sophisticated items. A sales engineer usually provides technical
support, and works with another sales representative who cans regularly
on a given account.
(f)
Creative sales person- an order getter- This involves the
creative selling of goods and intangibles- primarily services, but also social
causes and ideas (do not use drugs, stop smoking, obeys speed limits).
This category contains the most complex, difficult and hence most
challenging sales jobs-especially the creative selling of intangibles, because
you can not see, touch, taste, or smell, then customers often are not aware
of their need for a seller’s product or they may not realise how that product
can satisfy their wants better than the product they are now using- creative
selling often involves designing a system to fit the needs of a particular
customer.
11.3.4 The personal selling process
The basic philosophy underlying the approach to personal selling
should be an extension of the marketing concept. This implies that, for
long-term survival it is in the best interest of the sales person and his/her
company to identify customer needs and aid customer decisionmaking by
selecting from the product range those products which best fit the
customer’s requirements.
Many persons have developed models for personal selling. Some say
that it is nothing but SPANCO (finding SUSPECTS, reaching PROSPECTS,
APPROACH, NEGOTIATION, CLOSE, AND ORDER TAKING) other say that
it is SPIN (SUSPECT, PROSPECT, INTERVIEW, and NEGOTIATION).
However, in order to develop personal selling skills we will distinguish six
10
phases of the selling process. These phases are not watertight
compartments and may not occur in the given order. Objections may be
raised during presentation or during negotiation, or a trial close may be
attempted at any point during the presentation if buyer interest is high.
Furthermore, negotiation mayor may not take place and may occur during
any of the stages.
(a)
The Opening- Initial impressions can cloud later perceptions,
and so it is important to consider the ways in which a favourable initial
response can be achieved. There is a saying that ‘first impression is the
last impression’ you get. Buyers expect sales people to be business-like in
their personal appearance and behaviour. Untidy hair and a sloppy
manner of dress can create a lack of confidence picture. Further the sales
person who do not respect the fact that the buyer is likely to be a busy
person, may cause irritation on the part of the buyer.
Sales people should open the sales call with a smile, a handshake
and, in situations where they are not known to the buyer, introduce
themselves and the company they represent. Common courtesies should
be followed. Opening remarks are important since they set the tone for the
rest of the sales interview. This can generate close rapport with the buyer,
but the sales person must be aware of the reason for being there, am not
be excessively diverted from talking business.
(b)
Need and problem identification- Most salespeople have a
range of pro ducts to sell. A car salesman has many models ranging from
small economy cars to super luxury top-of-the range models. The computer
salesperson will have a number of systems to suit the needs and sources
of different customers. In each case, the seller’s first objective should be to
discover the problems and needs of the customer.
Before a car salesperson can sell a car, he needs to understand the
customer’s circumstances. What size of car is required? Is the customer
11
looking for high fuel economy or performance? What kind of price range
being considered? Having obtained this information the salesperson is in
a position to sell the model which best suits the needs of the buyer.
(c)
The presentation and demonstration- Once the problems and
needs of the buyer have been identified, the presentation follows as a
natural consequence. A given product may have a range of potential
features that confers benefits to customers, but different customers· place
different priorities on them. Having identified the needs and problems of
the buyer, the presentation provides the opportunity for the salesperson to
convince the buyer that he/she can supply the solution.
There is a Chinese proverb- “Tell me and I’ll forget; show me and I
may remember; involve me and I shall understand.” This proverb is very
important in a sales call. Demonstrations reduce risk because they prove
the benefits of the product. Car salespeople allow customers to test drive
cars. For all but the most simple of products it is advisable to divide the
demonstration into two stages. The first stage involves a brief description
of the features and benefits of the product and an explanation of how it
works. The second stage entails the actual demonstration itself.
There are several advantages of demonstrations. They add realism to
the sales routine in that they utilize more human senses than mere verbal
descriptions or visual presentation. When a potential customer is
participating in a demonstration it is easier for the salesperson to ask
questions in order to ascertain buying behaviour. Customer objections can
be more easily overcome if they can be persuaded to take part in the
demonstration process. There are advantages to customers in that it is
easier for them to ask questions in a more reliable way in order to ascertain
the product’s utility more clearly and quickly. Purchasing inhibitions are
quickly overcome arid buyers; declare their purchasing interest sooner
than in face-to-face selling/buying situations. Once a customer has
12
participated in a demonstration there is less likelihood of ‘customer
remorse’ (i.e. the doubt that value for money is not good value after all).
(d)
Dealing with objections- Objections should not always be
viewed with dismay by salespeople. Many objections are simply
expressions of interest by the buyer when the buyer is asking for further
information because he or she is interested in what the Salesperson is
saying. The problem is that the-buyer is not yet convinced. Objections
highlight the issues which are important to the buyer. The effective
approach for dealing with objections involves two areas: tile preparation of
convincing answer, and the development of a range of techniques for
answering objection in a manner which permits the acceptance of these
answers without loss of face on the part of the buyer.
(e)
Negotiation- In some selling situations, the salesperson or
sales team have a degree of discretion with regard to terms of the sale.
Negotiation may, therefore, enter into the sales process. Sellers may
negotiate price, credit terms, delivery times, trade-in values and other
aspects of the commercial transaction. The deal that is arrived at, will be
dependent upon the balance of power and the negotiating skills of the
respective parties. The buyer’s needs, the competition that the- supplier
faces, knowledge about the buyer’s business, and the pressures upon
him/her should be estimated.
(f)
Closing the sales- The skills and techniques discussed so far
are not in themselves sufficient for consistent sales success. A final
ingredient necessary to complete the process is the ability to close the sale.
A major consideration at the closing is the timing. A general rule is to
attempt to close the sale when the buyer displays heightened interest or a
clear intention to purchase the product. Salespeople should look out for
such buying signals and respond accordingly. Purchase intentions are
unlikely to grow continuously throughout the sales presentation, they are
more likely to rise and fall as the presentation progresses. The salesperson
13
should attempt to close at a peak and which peak is to be chosen comes
with experience.
(g)
Follow-up- This final stage in the sales process is necessary to
ensure that the customer is satisfied with the purchase and that no
problem with such factors as delivery, installation, product use and
training has arisen. Salespeople may put-off the follow up call because it
does not result in an immediate order. However, for most companies repeat
business is the hallmark of success and follow-up call can playa major role
in showing that a salesperson really cares about the customer rather than
only being interested in making sales. The follow-up call can also be used
to provide reassurance that the purchase was right one.
11.3.5 Changing patterns in personal selling
Traditionally, personal selling has been a face-to-face, one-to-one
situation between a sales person and a buyer. This situation existed both
in retail sales involving ultimate consumers and also in businesstobusiness transactions. In recent years, however, many different selling
patterns have emerged. These new patterns reflect a growing purchasing
expertise among consumers and business buyers, which, in turn, has
fostered a growing professionalism in personal selling. Let’s discuss four of
these emerging patterns:
(a)
Selling centres-Team Selling- To match the expertise on the
buying side, especially in business markets, a growing number of firms on
the selling side have adopted the organizational concept of a selling centre.
This is sometimes called a sales team or team selling. A selling centre is a
group of people representing a sales department as well as other’
functional
areas
in
a
firm
such
as
finance,
production,
and
researcha.’1ddevelopment (R&D). Procter & Gambler, for example, has
selling teams comprised of sales people plus representatives from finance,
14
distribution, and manufacturing. Each team is assigned to cover large
retailers.
When AT&T sells to a large multinational firm such as Nestle’s, then
AT&T sends a separate selling team to deal with each of Nestle’s major
divisions. Team selling is expensive and is used only when there is a
potential for high sales volume and profit.
(b)
Systems Selling- The concept of system selling means selling a
total package of related goods and services- a system-to solve a customer’s
problem. The idea is that the system- the total package of goods and
services- will satisfy the buyer’s needs more effectively than selling
individual products separately. Xerox, for example, originally sold
individual products, using a separate sales force for each major product
line. Today using a systems-selling approach, Xerox studies at customer’s
office information and operating problems then Xerox provides a total
automated system of machines and accompanying services to solve that
customer’s office problems.
(c)
Relationship
Selling-
Cultivating
a
mutually
beneficial
relationship with selected customers over time is relationship selling. It
may bean extension of team selling, or it may be developed by individual
sales representatives in their dealings with customers. In relationship
selling, a seller discontinues the usual territorial practice of covering many
accounts. Instead seller attempts to develop a deeper, longer-lasting
relationship built on trust with key customers- usually influential
customers, opinion-makers, and larger accounts. Unfortunately, often
there is not much trust found in buyer-seller relationships, neither in
retailer- consumer selling nor in business-tobusiness selling.
Many large companies- Procter & Gamble, Hyatt Hotels, RJR
Nabisco, Kraft General Goods, and ABB (Asea Brown Boveri, a Swissbased
15
manufacturer of industrial equipment), to name just few- are realigning
their sales forces to engage in relationship selling.
11.4 SALES PROMOTION
Sales Promotion is an activity or material (or both) that acts as a
direct inducement and offers added value to or incentive to buy the product
to resellers, sales persons or consumers. It consists of a diverse collection
of incentive tools, mostly short term, designed to stimulate quicker or
greater purchase of particular product or services by consumers or traders.
Sales promotion has grown dramatically in the last ten years, largely
because of focus of business on short term profits. A decade ago, the
advertising-to-sales-promotion ratio was about 60:40. Today, in many
consumer-packaged-goods companies, sales promotion accounts for 65%
to 75% of the combined budget. Sales promotion expenditure has been
increasing as a percentage of budget expenditure annually for the last two
decades and the fast growth is expected to continue. Several factors have
contributed to the rapid growth of sales promotion, particularly in
consumer markets.
Internal factors include the following:
•
Promotion is now more accepted by top management as an
effective sales tool;
•
Product managers are under greater pressure to increase their
current sales.
External factors include the following:
•
The number of brands have increased;
•
Competitors use promotions frequently;
•
Many brands are seen as similar;
•
Consumers are more price-oriented;
16
Advertising efficiency has declined because of rising costs,
•
media clutter, and legal restraints.
Sales promotion is a key ingredient in marketing campaigns and
includes tools for:
(a)
include
Consumer Promotion: These are aimed at consumers and
Samples,
Coupons,
Cash-refund-offers,
Premiums,
Prizes,
Rewards, Free trials, Warranties/Guarantees, Tie-in-promotions, Point-ofpurchase displays and demonstrations.
(b)
Trade Promotion: These are aimed at distribution channel
members and include Price offs, Advertising and Display allowances, and
Free goods.
(c)
Business
and
Sales
force
Promotion:
(Trade
shows,
Conventions, Contests for sales reps, and Speciality Advertising).
11.4.1 Objectives of Sales Promotion
Sales promotion objectives are derived from broader promotion
objectives, which are derived from more basic marketing objectives. The
specific objective set for sales promotion varies with the target market.
In relation to consumers, objectives of sales promotion include:
•
Encouraging purchase of large size units.
•
Building trial among non-users.
•
Attracting switchers away from competitors’ brands.
In relation to retailers, objectives include:
•
Persuading retailers to carry new items and higher levels of
inventory,
•
Encouraging off-season buying,
•
Encouraging stocking of related items,
17
•
Off-setting competitive promotions,
•
Building brand loyalty and gaining entry into new retail
outlets.
In relation to the sales force, objectives include:
•
Encouraging support of a new product or model,
•
Encouraging more prospecting, and
•
Stimulating off-season sales.
11.5 MAJOR CONSUMER PROMOTION TOOLS
(a)
SAMPLES: Offer of a free amount of a product or service. These
might be delivered door to door or found attached to another product or
featured in an advertising offer. Sampling is the most effective and most
expensive way to introduce a new product.
(b)
COUPONS: Certificates entitling the bearer to a stated saving
on the purchase of a specific product. These can be mailed or enclosed in
other products or inserted in magazines and newspaper ads. Coupons can
be effective in stimulating sales of a mature brand and inducing early trial
of a new brand.
(c)
CASH REFUND OFFERS: Provide a price reduction after the
purchase rather than at the retail shop. The manufacturer refunds a “part
of purchase price” by mail after receiving a “specified proof of purchase”.
(d)
PRICE PACKS: They can take the form of a reduced-price pack
(such as two for the price of one) or banded pack, which is two related
products banded together. Price-packs are very effective in short-term
sales even more so than coupons.
(e)
PREMIUMS: Merchandise offered at a relatively low cost or free
as an incentive to purchase a particular product. The package itself, if a
reusable container, can serve as a premium.
18
(f)
PRIZES: Offer a chance to win cash, trips or merchandise as
a result of purchasing something. A contest calls for consumers to submit
an entry, a jingle, estimate, suggestion to be judged by a panel of judges
who will select the best entries.
(g)
FREE TRIALS: Invite prospective purchasers to try the product
without cost, in the hope that they will buy the product.
(h)
PRODUCT WARRANTIES/GUARANTEES: Explicit or implicit
promises by sellers that the product will perform as specified or that the
seller will fix it or refund the customer’s money during a specified period.
(i)
TIE-IN-PROMOTIONS: Involves two or more companies or
brands that team up on coupons, refunds and contests to increase their
pulling power. The companies pool their funds with the hope of broader
exposure and multiple sales-forces push these promotions to retailers.
(j)
POINT-OF-PURCHASE DISPLAYS AND DEMONSTRATION:
Take place at the point of purchase or sale.
11.5.1 Major Trade-promotion Tools
(a)
PRICE-OFF: A straight discount off the list price on each case
purchased during a stated time period. The offer encourages dealers to buy
a quantity that they might not ordinarily buy. The dealers can use the
buying allowance for immediate profit, advertising or price reductions.
(b)
ALLOWANCE: An amount offered in return for the retailers
agreeing to feature the manufacturer’s product in some way. An
advertising
allowance
compensates
retailers
for
advertising
the
manufacturer’s product. A display allowance compensates them for
carrying a special product display.
19
(c)
FREE GOODS: Offers of extra cases of merchandise to
intermediaries who buy a certain quantity. Manufacturers might offer
push money or free specialty advertising items to the retailers that carry
the company’s name, such as pens, pencils, calendars, paperweights,
memo pads, and ashtrays.
11.5.2 Major Business-promotion tools
(a)
TRADE SHOWS AND CONVENTIONS: Industry associations
organize annual trade shows and conventions. Firms selling products and
services to a particular industry buy space and set up booths and displays
to demonstrate their products at the trade shows. The participating
vendors expect several benefits, including several new sales leads,
maintaining customers’ contacts, introducing new products, educating
customers with publications, motion pictures and audio-visual materials.
(b)
SALES CONTESTS: It is a contest involving the sales force or
dealers, aimed at inducing them to increase their sales over a stated
period, with prizes going to those who succeed. The good performance may
receive trips, cash prizes or gifts.
(c)
SPECIALITY ADVERTISING: Specialty advertising consists of
useful, low cost items given by salespeople to prospects and consumers
without obligation and which bear the company’s name and address and
sometimes an advertising message. The item keeps the company’s lame
before the prospects and creates goodwill because of the items utility.
11.6 DEVELOPING THE SALES-PROMOTION PROGRAM
In this context, there are specific tasks like:
(i)
The marketer has to determine the size of the incentive to offer.
Ascertaining minimum incentive is necessary if the promotion
is to succeed.
20
(ii)
Conditions for participation have to be established. A premium
might be offered only to those who turn in with the proof of
purchase.
(iii)
The marketer has to decide the duration of promotion. If the
sales promotion period is too short, many prospects will not
be able to take advantage of it. If the promotion period is too
long, the deal will lose some of its “act now” force.
(iv)
The marketer must choose a distribution cycle. Each
distribution method has a different level of reach, cost and
impact.
(v)
The timing of promotion must be established.
(vi)
The marketer must determine the total sales promotion
budget.
(vii)
Although sales promotion program are designed on the basis
of experience, pretests should be conducted to determine if the
tools are appropriate; the incentive size is optimal; the
presentation method is efficient.
11.7 IMPLEMENTING AND CONTROLLING THE PROGRAM
Implementation and control plans should be prepared for each
individual promotion. Implementation planning must cover lead time sell
in time. Lead time is the time necessary to prepare the program prior to
launching it. Sell-in time begins with the launch and ends when
approximately 95% of the deal merchandise is in the hands of consumers,
which can take one to several months, depending on the deal duration. It
covers initial planning, design and approval of package modifications or
material to be mailed or distributed to the home, preparation of conjunctive
advertising and point-of-sale material, notification of field personnel,
establishment and allocations for individual distributors, purchasing and
printing of special premiums and packages, production of advanced
21
inventories and staging at distribution centres in preparation for release at
a specific date, and finally, the distribution to the retailer.
11.8 EVALUATING THE SALES-PROMOTION PROGRAM
Evaluation is a crucial requirement. Manufactures can use four
methods to measure sales promotion effectiveness:
(a)
Sales Data: Examine the sales data before, during, and after a
promotion. Sales promotion works best, in general, when they attract
competitors’ customers to try a superior product and as a result customers
switch permanently.
(b)
Consumer panel: Consumer Panel data would reveal the kind
of people who responded to the promotion and what they did after the
promotion.
(c)
Consumer surveys can be conducted to gain more information,
learn how many recall the promotion, what they thought of it, how many
took advantage of it, and how the promotion affected their subsequent
brand-choice behaviour.
(d)
Experiments: Experiments evaluate· such attributes as:
incentive value, duration, and distribution media.
Beyond these methods of evaluating the results of specific
promotions, management must recognize other potential costs and
problems:
•
Promotions might decrease long-run brand loyalty by making
more consumers deal prone rather than advertising prone.
•
There are hidden costs of special production runs, extra salesforce effort, and handling requirements.
•
Certain promotions irritate retailers and they demand extra
trade allowances or refuse to co-operate in the operation.
22
11.9 PUBLIC RELATIONS
Public relation (PR) is another important marketing tool. Not only
must the company relate it constructively to its customers, suppliers and
dealers, but it must also be related to a large set of interested publics.
PR department perform the following five activities, not all of which
directly support marketing objectives:
(i)
Press relations: The aim of press relations is to place
newsworthy information into the news media to attract attention to a
person, product, service, or organization.
(ii)
Product publicity: Product publicity involves various efforts to
publicize a specific product.
(iii)
external
Corporate communication: This activity covers internal and
communications
and
promotes
understanding
of
the
organization.
(iv)
Lobbying: It involves dealing with legislators and government
officials to promote or defeat legislation and regulation.
(v)
Counselling: Counselling involves advising management about
public issues and company positions and image.
11.9.1 Marketing Public Relation as Publicity
The old name for Marketing Public Relations (MPR) was publicity,
which was seen as the task of securing editorial- as opposed to paid spacein print and broadcast media to promote a product, place, or person. But
MPR goes beyond simple publicity by contributing to the following tasks:
(a)
Assist in the launch of new products.
(b)
Assist in repositioning a mature product.
(c)
Build up interest in a product category.
23
(d)
Influence specific target groups.
(e)
Defend products that have encountered public problems.
(f)
Build the corporate image in a way that projects favourably on
its products.
11.9.2 Objectives of Public Relations and Publicity
(a)
Build awareness: PR can place stories in the media to bring
attention to a product, service, person, organization or idea.
(b)
Build credibility: PR can add credibility by communicating the
message in an editorial context.
(c)
Stimulate the sales-force and dealers: PR can help boost
salesforce and dealer enthusiasm. Stories about a new product before it is
launched will help the sales farce sell it to retailers and consumers.
(d)
Hold down promotion costs: PR costs less than direct mail and
media advertising. The smaller the company’s promotion budget, the
stronger is the case for using PR to gain share of mind.
11.9.3 Major tools of Public Relations and Publicity
(a)
PUBLICATIONS:
Companies
rely
extensively
on
communication materials to reach and influence target markets. These
include annual reports, brochures, articles, audio-visual materials, and
company newsletter and magazines. Company newsletters, and magazines
can help build up the company’s image and convey important news to
target markets. Audio-visual material, such as films, slides, and video and
audio cassettes are coming into increasing use as promotion tools. The
cost of audio-visual material is usually greater than the cost of printed
material, but so is the impact.
(b)
EVENTS: Companies can draw attention to’ new products or
other company activities by arranging special events. These include news
24
conferences, seminars, outings, exhibits, contests and competitions,
anniversaries, and Sport and culture sponsorships that will reach the
target publics.
(c)
NEWS: One of the major tasks of PR professionals is to’ find
or create favourable news about the company, its products, and its people.
News generation require skills in developing a story concept, researching
it, and writing a press release. But the PR person’s skill must go beyond
news preparing stories. Getting the media to’ accept press releases and
press conferences calls for marketing and interpersonal skills. A good PR
media director understands the press’ needs far stories that are interesting
and timely. The media director needs to build favourable relations with
editors and reporters. The mare the press is cultivated, the mare likely it
is to give more and better coverage of the company.
(d)
SPEECHES: Speeches are another tool for creating product
and company publicity. Increasingly, company executive must face
questions from the media or give speeches at trade associations or sales
meetings. These appearances can build the company’s image.
(e)
PUBLIC SERVICE ACTIVITIES: Companies can improve public
goodwill by contributing money and time to good causes. A large company
may typically ask executives to support community affairs where their
offices are situated. In other instances, companies may donate a certain
amount of money to specified cause out of consumer purchases.
(f)
IDENTITY MEDIA: Normally, a company’s materials acquire
separate looks, which creates confusions and misses an opportunity
tocreate and reinforce a corporate identity. In an over-communicated
society, companies have to compete for attention. They should strive to
create a visual identity that the public immediately recognizes. The visual
identity is carried by the companies’ logos, stationary, brochures, signs,
25
business forms, business cards, buildings, uniforms and dress codes, and
rolling stock.
11.10 SUMMARY
This chapter has analysed the elements of the promotion mix.
Although each element of the mix is separate and different role to play,
they are very much interdependent. The importance of each mix varies at
different stages in the entire communication process. All elements share a
similar process of setting objectives, developing a strategic plan,
implementing the plan, and then evaluating the results.
Sales promotion includes wide range of tools like free samples, off
price incentives, coupons/vouchers, gift offers, and bonuses etc. Public
relation is used to establish and enhance a positive image of an
organisation and its products among its various publics. A wide range of
public relation tools is available including press releases, lobbying,
education and training, and exhibitions and trade shows etc. Personal
selling involves interpersonal dialogue. It requires person to perform
interaction between a potential consumer and a sales person. Personal
selling requires grate amount of skills on the part of the salesperson.
He/she should possess total command on communication.
11.11 KEYWORDS
Selling: Knowing the art of sales— contacting, presenting, answering
objections, and closing.
Cooperative advertising: Advertising which is done by a local
intermediary especially at the time of opening up of a new outlet.
Public relations: It is the deliberate, planned and sustained effort to
establish and maintain mutual understanding between an organization
and its publics.
26
Press releases: This is the most frequent tool of public relations
which is done at the time of a new product launch, new appointments, or
significant achievements.
Direct marketing: When a firm communicates directly with its
customers without having to go through any retailer or wholesaler or any
other intermediaries.
11.12 SELF ASSESSMENT QUESTIONS
1.
What do you understand by promotion mix? Discuss the
advantages of promotion mix tools.
2.
Write short notes on the following:
(a) Sales Promotion (b) Personal selling
3.
Discuss the various stages of personal selling process.
4.
What is personal selling? Discuss the process and advantages
of personal selling.
11.13 REFERENCES/SUGGESTED READINGS
1.
Frank G. Bingham, Jr., “Business marketing management”,
NTC business books, Lincolnwood, Illinois, USA, 1998.
2.
William J. Stanton, Michael J. Etzel, and Bruce J.Walker,
“Fundamentals of Marketing,” McGraw Hill International,
USA, 10th edition, 1996.
3.
Philip Kotler, Swee Hoon Ang, Siew Meng Leong, and Chin
Tiong Tan, “Marketing Management- An Asian perspective”,
Prentice Hall, Simon & Schuster (Asia) Pte. Ltd., Singapore,
1996, pp. 750-785.
27
4.
Philip Kotler, “Marketing Management- Analysis, Planning,
Implementation, and Control”, 6th edition, Prentice Hall of
India Pvt. Ltd., New Delhi, 1988.
5.
Ramaswamy,
V.S.
and
Namakumari,
S.,
“Marketing
Management- Planning, Implementation, and Control- The
Indian context”, 2nd edition, Macmillan India Limited, New
Delhi, 1999.
6.
David
E.
Cravens,
and
Gerald
E.
Hills,
“Marketing
Management”, AITBS publications, New Delhi, 1996.
7.
Richard R Still, Edward W. Cundiff, and Norman A.P. Govoni,
“Sales Management- Decisions, Strategies, and Cases”, 5th
edition, Prentice Hall of India Pvt. Ltd., . New Delhi,
1988,pp.16-57.
8.
Geoffrey Lancaster and David Jobber, “Selling and sales
management” 3rd edition, Macmillan India Ltd., New Delhi,
1994.
28
LESSON-12 CHANNEL MANAGEMENT
STRUCTURE
12.0 Objectives
12.1 Introduction
12.2 Understanding Channels of Distribution
12.3 Reasons for Emergence of Channels
12.4 Functions and Flows in Marketing Channels
12.5 Participants in the channel
12.6 Designing Distribution Channels
12.7 Selecting Channel Members
12.8 Vertical Marketing System
12.9 Conflict Management
12.10 Summary
12.11 Keywords
12.12 Self Assessment questions
12.13 References/Suggested Readings
12.0
OBJECTIVES
•
Discuss the role of marketing channel in the exchange
process.
•
Explain the rationale for emergence and existence of
intermediaries.
•
Describe the functions to be performed in distribution system.
•
Explain the selection of channel members and vertical
marketing system.
•
The causes of channel conflict and managing it.
1
12.1
INTRODUCTION
Exchange is the core aspect of marketing. Ownership of a product
has to be transferred somehow from the individual or organisation that
makes it to the consumer who needs and buys it. Goods also must be
physically transported from where they are produced to where they are
needed. Services ordinarily can not be transported but rather are produced
and consumed simultaneously. Distribution’s role within marketing mix is
getting the product to its target market. The most important activity in
getting a product to market is arranging for its sale from producer to final
consumer. Other common activities are promoting the product, storing it,
and assuming some of the financial risk during the distribution process. A
producer can carry out these functions in exchange for an order from a
customer. Typically, however, firms called middlemen perform some of
these activities on behalf of the producer.
In today’s economy, most producers do not sell their goods directly
to the final users. Between them and the final users stand a host of
marketing intermediaries performing a variety of functions and bearing a
variety of names. Some intermediaries, such as wholesalers and retailers
buy, take title to, and resell the merchandise; they are called merchant
middlemen. Others, such as brokers, manufacturer’s representatives, and
sales agents, search for customers and may negotiate on behalf of the
producer but do not take title to the goods; they are called agent
middlemen. Still others, such as transportation companies, independent
warehouses, banks, and advertising agencies, assist in the performance of
distribution but neither take title to goods nor negotiate purchases or sales;
they are called facilitators.
Marketing-channel decisions are among the most critical decisions
faced by management. The company’s chosen channels ultimately affect
all the other marketing decisions. A distribution system is a key external
2
resource. Normally it takes years to build, and it is not easily changed. It
ranks in importance with key internal resources such as manufacturing,
research, engineering, and field sales personnel. It represents a significant
corporate commitment to large numbers of independent companies whose
business is distribution, and to the particular markets they serve. It
represents as well, a commitment to a set of policies and practices that
constitute the basic fabric on which is woven an extensive set of long term
relationships.
Individual consumers and corporate buyers are aware that literally
thousands of goods and services are available through a very large number
of diverse channel outlets. What they might not be well aware of is the fact
that the channel structure, or the set of institutions, agencies, and
establishments through which the product must move to get to them, can
be amazingly complex.
12.2
UNDERSTANDING CHANNELS OF DISTRIBUTION
Even before a product is ready for market, management should
determine what methods and routes will be used to get it there. This means
establishing strategies for the product’s distribution channels and physical
distribution. A distribution channel consists of the set of people and firms
involved in the transfer of title to a product as the product moves from
producer to ultimate consumer or business user. A channel of distribution
always includes both the producer and the final customer for the product
in its present form as well as any middlemen such as retailers and
wholesalers. When a manufacturer in order to deliver his goods and
services to his final consumers utilizes a set of extra-corporate institutions
to affect this distribution, that is called, a channel of distribution.
Marketing channels or channel of distribution can be viewed as sets
of interdependent organisations involved in the process of making a
product or service available for consumption or use.
3
From the outset, it should be recognised that not only marketing
channels satisfy demand by supplying goods and services at the right
place, quantity, quality and price; but they also stimulate demand through
the promotional activities of the channel members, e.g., retailers,
manufacturers’ representatives, sales offices, wholesalers etc., constituting
them. A channel of distribution, therefore, should be viewed as a network
that creates value for end-users by generating form, possession, time, and
place utilities.
A major role that distribution plays in any economy is that it
constitutes the process by which goods and services become available for
use or consumption. Producers of goods and services specialise in
generating structural or form utility for their products, in the sense that
they create a unique set of demand satisfiers in the form of their offering.
The actual mass scale delivery of these offerings to the consuming public
requires a different type of specialised effort, which generates time, place
and possession utility as well. In fact, the four types of utility (form, time,
place, and possession) are inseparable, there can be no complete product
without incorporating all four into any given object idea or service.
Furthermore, one cannot obtain and consume a product unless the
product is transported to a place where one can get access to it, stored till
one is ready to buy it and ultimately exchange for money so that one can
gain possession of it. Rarely are the producers or manufacturers in a
position to do all these tasks by themselves. A set of intermediaries
specialising in some or all of these tasks, therefore, need to be utilised to
make the product or service available for consumption. As marketers
continue to face hostile, unstable, and competitive environment,
distribution will play an increasingly important role. Companies are
already moving into new distribution channels that match up with market
segments more precisely and effectively. Executives will pay more attention
4
in the future to the distribution channels they select to gain a competitive
advantage over other companies or competitors.
12.3
REASONS FOR EMERGENCE OF CHANNELS
In order to understand the marketing channel, it is important to
know the reasons for emergence of distribution channels. The primary
justification of their existence is economic. There is nothing to prevent a
producer from distributing his goods or services by himself. In fact, by
using intermediaries, he loses a significant degree of control over the
conditions of sale to the final consumer and incurs the cost of margins to
be paid to the middlemen. Why then, do they use intermediaries? The
answer lies in the economy and efficiency generated through division of
labour and specialisation. Channels of distribution in any given economic
system emerge because of the following reasons:
(a)
Efficiency rationale for intermediaries
Intermediaries arise in the process of exchange and they can improve
the efficiency of the process. Marketing activities revolve around the
satisfaction of needs and wants through the exchange process. In order to
facilitate exchange, barriers of exchange need to be successfully overcome.
The first barrier for smooth exchange results from the fact that sources of
supply and centres for demand are located at widely dispersed location.
Since
sources
of
supply
and
centres
of
demand
are
dispersed
geographically throughout the country, there arises the need for physical
movement. This need for physical movement is further complicated by the
fact that consumers, at varying distance from the manufacturers, require
intermittently only small quantities of product which if transported to
individual consumers would make the transportation cost prohibitive. This
problem is referred to as spatial discrepancy between production and
consumption.
5
The second barrier to smooth exchange process arises because of
time of production and the time at which the goods are needed for
consumption or use may differ widely. Mass consumption products have
to be produced and stocked for in advance of consumption. This
discrepancy, referred to as temporal discrepancy between time of
production of output and its consumption, creates requirement of
inventory stocking.
The third barrier arises from the variation in quantities and
assortment demanded. Manufacturers typically produce large quantities of
an item or a class of items while the consumers purchase only a limited
quantity of a wide variety of items at a time. While producers specialise in
production of a few products, the consumers need a very wide variety of
items to fulfil their needs and wants. Therefore, facilitate the exchange
task, specific quantities and unique assortments must be built up from the
range of products produced. This problem signifies the discrepancy of
quantity and assortment in the exchange process.
The last barrier to exchange process comes from the intention to buy.
The fact that the right products are available in the right quantities and
desired assortments at the right place is no guarantee that desired
exchange would take place. This situation necessitates that the suppliers
of product offerings and utilities try to influence the exchange process
towards their own market offerings.
Marketing intermediaries emerge because they perform a very
effective role in overcoming these barriers to the exchange process.
6
(b)
Discrepancy of Assortment and Sorting
Channel intermediaries arise to adjust the discrepancy of assortment
through the performance of the sorting process. In addition to increasing
the efficiency of transactions, intermediaries smooth the flow of goods and
services by creating possession, place and time utilities. These utilities
enhance the potency of the consumer’s assortment. One aspect of this
smoothing process requires that intermediaries engage in a sorting
function. The sorting function is performed by intermediaries that include
the following activities:
•
Sorting out: This involves breaking down a heterogeneous
supply into separate stocks that are relatively homogeneous.
•
Accumulation: It concerns bringing similar stocks from a
number of sources together into a larger homogeneous supply.
Wholesalers accumulate varied goods for retailers, and
retailers accumulate goods for their customers.
•
Allocation: It refers to breaking a homogeneous supply down
into smaller and smaller lots. Goods received in truck loads
are sold in case lots. A buyer of case lots in turn sells
individual items. The allocation process generally coincides
with geographical dispersal and successive movement of
products from origin to end consumer.
•
Assorting: This is the building up of an assortment of products
for resale in association with each other. Wholesalers built
assortment of goods for retailers, and retailers build
assortment for their customers.
(c)
Routinisation
Marketing agencies hang together in channel arrangements to
provide for the routinisation of transactions. Each transaction involves
ordering, valuating of, and paying for goods and services. The buyer and
7
seller must agree to the amount, mode and timing of payment. The cost of
distribution can be minimised if the transactions are routinised; otherwise,
every transaction is subject to bargaining, with an accompanying loss of
efficiency.
Moreover, routinisation facilitates the development of the exchange
system. It leads to standardization of goods and services whose
performance characteristics can be easily compared and assessed. It
encourages production of items that are more highly valued. In fact,
exchange relationships between buyers and sellers are standardized so
that lot size, frequency of delivery and payment, and communication are
routinised. Because of routinisation, a sequence of marketing agencies can
perform more efficiently together in a channel.
(d)
Searching
Buyers
and
sellers
are
constantly
engaged
in
search
for
consummation of desired exchanges. In other words, both buyers and
sellers are engaged in double-search process in the market place. The
process of search involves uncertainty because producers are not certain
of consumers’ needs and consumers are not certain that they will be able
to find what they want. Marketing channels facilitate the process of
searching. For example, products such as over the counter drugs are
widely available through a wide variety of outlets like general stores, drug
stores, super markets and provisional stores.
12.4
FUNCTIONS AND FLOWS IN MARKETING CHANNELS
Manufacturers, wholesalers, and retailers as well as the other
channel members exist in channel arrangements to perform one or more
of the functions such as, order processing, carrying of inventory, demand
generation, physical distribution, etc. At any given time the functions
performed by the channel members are more basic than institutions
8
themselves. Therefore, while channel institutions can be eliminated or
substituted, the functions performed by them cannot. The functions that
need to be necessarily performed in a channel system include transfer of
ownership through selling, transfer of possession through transportation,
order processing, inventory carrying, storage, sorting, negotiation and
promotion. The same function in a given channel system may be performed
at more than one level of the marketing channel, the work load for the
function is shared by the members at all levels. For example,
manufacturer, wholesalers, and retailers may all carry inventory. This
duplication and redundancy in the channel may increase the distribution
cost. However, the increase in cost is justifiable to the extent that it may
be necessary in order to provide goods to customers at the right quantity,
time, and place.
Flow in channels is referred as a set of functions performed in
sequence by channel members. Therefore, the term flow is descriptive of
movement. Figure 1 depicts important marketing flows. Physical
possession, ownership, and promotion are typically forward flows from
producer to consumer. Each of these moves down the distribution channela manufacturer promotes its product to a wholesaler, which in turn
promotes it to a retailer, and so on. The negotiation, financing, and risk
flows move in both directions, whereas, ordering and payment are
backward flows.
9
Figure 1. Marketing Flows in Channels
Source: Louis W. Stern, Adel I. El-Ansary and Annet T. Coughlan
“Marketing Channels”, Prentice Hall of India Pvt. Ltd.)
12.5
PARTICIPANTS IN THE CHANNEL
There are two types of participants in the channel. The primary
participants in the channels of distribution are the manufacturer, the
middlemen i.e. the wholesalers, manufacturers’ agents and retailers. The
secondary participants include the facilitating agencies like the financial
institution, public warehouses, public carriers and the advertising
agencies.
(a)
Primary participants
Wholesalers: Wholesalers are defined as all establishment or places
of business primarily engaged in selling merchandise to retailers to
industrial commercial, industrial institutional or professional users, or to
other wholesalers or acting as agents in buying or selling merchandise to
such companies. Two classes of wholesaler establishments can be clearly
distinguished. These are the merchant wholesaler and the manufacturers’
agents. The former are characterised by the fact that they take title to the
goods they distribute. Manufacturer’s agents buy and sell on behalf of the
manufacturer and nowhere in the exchange process take title to goods.
10
Merchant wholesalers may be of several types for example commission
merchants, selling agent, buying agents cash and carry wholesalers etc.
Retailers: Retailers are all the establishments engaged in selling
merchandise
for
personal
or
household
consumption.
They
are
distinguished from wholesalers by the fact that they sell primarily for
ultimate use. Although wholesalers may also sell to ultimate consumers,
this selling activity does not form the bulk of their operation. A variety of
types of retail establishments exist in the Indian market today ranging from
sophisticated departmental stores and supermarkets to limited time stores
catering to a few customers and carrying limited merchandise.
(b)
Facilitating Participants
Financial Institutions: Financial institutions provide the essential
finances needed to finance primary participants of the channel system. A
very significant financing need relates to the provision of capital for
inventories, which must be financed at many levels as inventories move
from production to consumption.
Public warehouses: The public warehouses rent space to owners of
inventory thereby eliminating the need to invest in storage facilities. For
agricultural products the both government owned or privately owned
warehouses are extensively used.
Public carriers or transport carriers: Transportation forms a cost
centre in distribution management. To a large extent distributive effort is
dependent upon the services of public carriers like transporters and
railways to affect the transfer of physical possession of goods. The
efficiency of the transportation system influences the size of inventories
which must be maintained channel system. If a reliable transport system
is readily available, products can flow through the channel at a constant
rate, thus minimising the need for maintaining large inventories.
11
Advertising agencies: These facilitating agencies help in facilitating
negotiation, by creating awareness of products and stimulating demand.
They function at each level of the channel for producers, wholesalers and
retailers. Without the kind of information given through these agencies at
various levels, seeking and selecting product sources would become a
tedious task for buyers. Advertising agencies, therefore, help in the search
process.
12.6
DESIGNING DISTRIBUTION CHANNELS
A company wants a distribution channel that not only meets
customers’ needs but also provides an edge on competition. Some firms
gain a differential advantage with their channels. Marketers should keep
in mind the following points while designing distribution channels.
(a)
Specifying the role of distribution
A channel strategy should be designed within the context of the
entire marketing mix. First the firm’s marketing objectives are reviewed.
Next the roles assigned regarding product, price, and promotion are
specified. Each element may have a distinct role, or two elements may
share an assignment.
A company must decide whether distribution will be used defensively
or offensively. Under a defensive approach, a firm will strive for distribution
that is as good as, but not necessarily better than, other firms’ distribution.
With an offensive strategy, a firm uses distribution to gain an advantage
over competitors.
(b)
Selecting the type of channel
Once distribution’s role in the overall marketing programme has
been agreed on, the most suitable type of channel for the company’s
12
product must be determined. At this point in the sequence, a firm needs to
decide whether middlemen will be used in its channel and, if so, which
types of middlemen.
(c)
Determining intensity of distribution
The next decision relates to intensity of distribution, or the number
of middlemen used at the wholesale and retail levels in a particular
territory. The target market’s buying behaviour and the product’s nature
have a direct bearing on this decision.
(d)
Choosing specific channel members
The last decision is selecting specific firms to distribute the product.
When selecting specific firms to be part of a channel, a producer should
assess factors related to the market, the product, its own company, and
middlemen. Two additional factors are whether the middleman sells to the
market that the manufacturer wants to reach and whether the
middleman’s product mix, pricing structure, promotion, and customer
service are all compatible with the manufacturer’s needs.
12.7
SELECTING CHANNEL MEMBERS
Marketing channel decisions are among the most crucial decisions
company has to take. The company’s chosen channels intimately affect all
the other marketing decisions. The company’s pricing depends whether it
uses extensive distribution or selective distribution. Likewise sales force
and advertising decisions depends on how much training and motivation
the
intermediaries
need.
Effective
channel
decision
means
that-
management must take into consideration a number of constraints to
determine how they are likely to influence various channels structure. It is
seen that each manufacturer selects its intermediaries in the context of
constraints stemming from market, product, customer, company, etc.
13
The Market: Customer buying habits is one of the most important
aspects of the marketing process. If a customer is used to buying a
particular thing from a particular place, it is difficult to change his mindset.
It is seen that the market size and location play an important role in
distribution strategy of the company. If the buyers are concentrated in a
particular area, then distribution can be achieved with few middlemen, but
if buyers are scattered, then many middlemen are needed to cover up the
area.
The Product: Product characteristics are important elements which
should be taken into consideration for selection of intermediaries among
few important characteristics of a product, its nature, value, degree of
differentiation from competitive products. The products which physically
deteriorate fast and those which experience rapid fashion obsolescence are
considered to be highly perishable and require more direct marketing
because of the possibilities of delay and repeated handling of the product,
which may lead to its deterioration. In case of non-perishable products,
company may go in for indirect channel. It is seen that higher the cost per
unit of the product larger the investment to keep the inventories in the
market. In this case manufacturers may go in for intermediaries to share
the responsibility of marketing the product to ultimate user. In case of low
unit value products, companies choose indirect channels, unless value is
high enough involving high profit margin to support direct channels.
For marketing highly technical products, companies employ
technically
qualified
sales
and
service
personnel
for
product
demonstration, pre-purchase persuasion and post-purchase sales service.
Brand loyalty is highest in speciality goods and lowest in convenience
goods. In case of low brand loyalty products, substitutability is very easy,
and company has to employ intensive distribution. In order to provide
support for such products, the company offers more than normal margins
to its intermediaries. Some companies even use selective or exclusive
14
distribution system to provide necessary channel support. Customer
service is an important ingredient of the physical distribution system. It
can be used to differentiate the products, and may influence the pricing
policy of the market, if customers are willing to pay more for better service.
Product information means company’s ability to provide different types of
information to the customers. Customers are willing to know about the
status, confirmation of the orders or substitution of the order, or any other
relevant information regarding products. The company should provide
these product related information to the customer. The ability of channel
member to cooperate in this regard is also a factor in channel design. It
refers to the time required from placement of orders to the receipt of the
same by the customer and the ability of the supplier to meet consistently
the targeted order cycle time. It is seen that most customers generally
prefer consistent service to fast service, because in the former case it allows
them to plan inventory levels to a much greater extent than is possible with
a fast and highly variable order cycle.
Company’s Characteristics: Company’s characteristics are the
important element affecting channel selection decisions. It is generally seen
that the size of company plays an important role in deciding the size of the
market, thereby evolving a desired channel of distribution. Often it is stated
that the greater the financial resources available to company, the lower is
its dependence on intermediaries. Though it is not a hard and fast rule,
but in some cases like industrial and electronic products the company
generally employs its own sales and support services. Even small firms
with limited market coverage also sell the products directly.
Competitive Characteristics: Design of a channel is influenced by
competitors’ channels. In some cases manufacturer may want to compete
in or near the same distributive outlets selling the competitors products.
For example, Bata and Carona Shoes or Liberty Shoes outlets are often
situated near each other. But in some industries manufacturers want to
15
avoid the channels used by competitors because of scarcity of display
place, unhealthy competitions etc.
Environmental
Characteristics:
When
the
environmental
characteristics such as economic conditions are in depressed form,
manufacturers want that their product should move to the market in the
most economical way. In other words, economic environment has direct
effect on channel selection. In this case the company has to choose shorter
channel to avoid extra cost to be incurred on marketing the product. Since
the functionality of the intermediaries is influenced by the performance of
non-member participants, the company should analyse the impact of
economic, competitive, technical and legal environmental factors especially
since each of them is dynamic in nature.
12.8
VERTICAL MARKETING SYSTEM
One of the most significant recent channel developments consists of
vertical marketing system, which has emerged to challenge conventional
marketing channels. A conventional marketing channel comprises an
independent producer, wholesalers, and retailers. Each is a separate
business entity seeking to maximize its own profits, even if it reduces for
the system as a whole. No channel member has complete or substantial
control over the other members. Conventional channels are highly
fragmented networks in which loosely aligned manufacturers, wholesalers,
and retailers bargain with each other at arm’s length, negotiate
aggressively over terms of sale, and otherwise behaved autonomously.
A vertical marketing system (VMS), by contrast, comprises the
producer, wholesalers, and retailers acting as a unified system. Any one
channel member owns the others or franchises them or has so much power
that they all cooperate. The vertical marketing system can be dominated
by the producer, the wholesaler, or the retailer. VMSs are professionally
16
managed and centrally programmed networks, preengineered to achieve
operating economies and maximum market impact.
VMSs came into being to control channel behaviour and eliminate the
conflict that results when independent channel members pursue their own
objectives. They achieve economies through their size, bargaining power,
and elimination of duplicated services.
Vertical marketing systems are of three types, namely corporate,
administered and contractual. These are briefly described below:
(i)
vertical
Corporate Vertical Marketing System (VMS): In the corporate
marketing
system,
successive
stages
from
production
to
distribution are under single ownership of any of the channel members.
Vertical integration is achieved through forward or backward integration.
For example, Bata and Woodlands own their shoe shops across the country
while also manufacturing footwear. Likewise, Raymonds owns some retail
stores across the country while also producing textiles and woollens.
(ii)
Administered VMS: Unlike the corporate VMS, administered
VMS seeks to control successive stages from production to distribution not
through ownership but through the size and power of one of the channel
members. Brand leaders or firms that are market leaders are able to obtain
trade cooperation. Firms like Hindustan Lever, Lipton, Proctor and
Gamble, Nestle, TELCO, Maruti and others are able to get shelf space,
promotional support and also support for price policies from the trade,
mainly because their brands are market leaders.
(iii)
different
Contractual VMS: This consists of independent firms at
levels
of
production
and
distribution
integrating
their
programmes on a contractual basis to obtain larger economies of scale and,
or sales impact than they could achieve alone. Some are wholesaler
sponsored voluntary chains like the ones in vegetable and food markets,
17
others, retailer sponsored like Apna Bazaar in Mumbai (retail cooperatives)
and still others are franchises like Pepsi or Coke franchising a firm to
produce and market their range of soft drinks in different areas.
This form of VMS has a great future as synergies are possible.
12.9
CONFLICT MANAGEMENT
No matter how well channels are designed and managed, there will
be some conflict for no other reason than the interests of independent
business entities do not always coincide. To manage channel conflict
marketer must understand- the type; nature or the cause; and magnitude
of the conflict. He should also appreciate that conflict cannot be totally
eliminated. It can only be minimized.
(a)
Types of Conflict
In any channel arrangement there can be three types of conflict—
vertical level conflict; Horizontal level conflict; and Multi-channel level
conflict.
(i)
The Vertical Level Conflict: Vertical level conflict occurs when
the channel member at one level is in conflict with another member at the
next higher or lower level. For example, a conflict between the wholesaler
and the manufacturer is a vertical level conflict or the major retailers in
the town conflicting with the distributor over entitlements.
(ii)
Horizontal Level Conflict: Conflict at the same level between
channel members is called horizontal level conflict. Hence, inter stockist
conflict or conflict at the retail level among retailers on issues like pricing
and territory jumping are examples of horizontal level conflict.
(iii)
Multichannel Level Conflict: Sometimes the middlemen come in
conflict with the manufacturer, using both direct and indirect means of
distribution. Such a conflict is called multichannel level conflict. For
18
example, the firm may have its own franchise outlet or its own shop in an
area, where, it may also be distributing the product through established
middlemen. The former is direct distribution while the latter is indirect
distribution. The conflict may occur when the franchise prices its products
lower than the middlemen, wholesaler or dealer, or when the firm retails a
larger range of products through its own outlet than the wholesaler or
stockists. Likewise conflict occurs when an order has been obtained with
the joint efforts of the company’s sales force and dealer.
(b)
Nature or Causes of Conflict
Channel conflict occurs largely due to financial and non-financial
reasons. These in turn may be traced to the following causes:
(i)
Goal incompatibility: A major factor causing conflict between
manufacturers and wholesalers is the perceived goal incompatibility
between them. For example, while the manufacturer perceives his goals to
be market share and profit maximization in the long run, wholesalers
perceive their goal to be sales maximization and thereby profit
maximization. The latter even prefer to work at higher margins and on
short-term profitability. This makes the manufacturer accuse the
wholesaler of being “fair weather partners” and the wholesaler accuses the
manufacturer of squeezing his margins. This is typically what happens
with all large manufacturers and their channel members today.
(ii)
Role ambiguity: Many a time conflict has occurred because of
role ambiguity. This is a common cause of conflict in multichannel conflict.
For example, the role of the manufacturer’s sales force and dealer in selling
products to major accounts or institutional customers in the territory is
often unclear in some companies. This often creates conflict in these
companies, relationship with the channel.
19
A well known automobiles component manufacturer had such a
conflict when one of its distributors started directly selling to retailers,
through his mobile van bypassing large wholesalers in the territory. The
wholesalers revolted and started pushing the competitors’ products. Lack
of role clarity of any of the channel members can be a source of potential
conflict.
(iii) Differences in Perceptions of the Market: Different perceptions of
the market and economy may also create a conflict between the
manufacturer and middlemen. For example, a manufacturer may perceive
an opportunity in the booming Indian middle class market and, hence
introduce new products, multiple brands and even appoint wholesalers in
distant areas. The existing dealers of this firm may not see the picture this
way and may perceive the appointment of multiple dealers and downsizing
their (former dealers) territory as dilution of their control over the market.
(c)
Magnitude of the Conflict
This refers to the seriousness of conflicts. At times the conflict may
not be of a magnitude demanding the manufacturer’s attention. For
example, inter-dealer conflicts in the territory over prices or territory
jumping. But when the conflict assumes significant magnitude (this is
often reflected by the impact the conflict has on the manufacturer’s sales
and market share in the territory), the manufacturer must take the
initiative to resolve it. For, ultimately it is the manufacturer who is the
leader of the channel. Moreover, a serious conflict will affect his market
share in the territory.
(d)
Managing the Conflict
To minimize the conflict, the manufacturer may take the following
steps:
20
(i)
Communication: An effective way to minimize channel conflict
is to have regular communication between the manufacturers and the
channel members. Most Chief Executives today spend time with their
channel members to understand market dynamics and communicate
brand’s positioning strategies. These meetings are also used to resolve
channel member’s problems. While these are many a time informal
meetings some companies have an in-house newsletter which they send to
all their major dealers. This newsletter informs channel members of
happenings in the market place and also the company’s perspective of the
products and markets.
(ii)
Dealer councils: Another way to resolve conflict is through
formation of dealer councils. Such council can resolve issues in horizontal
level conflicts and even vertical conflicts. The manufacturer continues to
play the key role in these councils. Often the criticism or fear voiced in this
regard is that such councils can provide a platform for dealers to jointly
voice their grievance against the manufacturer. These councils unite
dealers. But, if the manufacturer can keep the councils focussed on market
leadership and maximization of returns on investment, and is also willing
to accept constructive suggestion, the dealer council can become an
effective tool for intervening in the market place.
(iii)
Superordinate goals: Another way to resolve channel conflict
is to evolve superordinate goal of maximizing customer satisfaction. If the
channel members can be motivated to perceive customer satisfaction as
the ultimate goal of all members in the channel and this in turn leading to
profit maximization of all concerned, then much of the conflict can be
resolved. Often superordinate goals development is easier only when the
threat from the other firms is high.
(iv)
Arbitration and mediation: Often, the conflict among channel
members may be resolved only through arbitration and mediation.
21
Generally in the intra-middlemen conflict-horizontal or vertical (wholesaler
vs retailers)- the manufacturer may arbitrate or mediate. But, when it is
between the manufacturer and dealers, arbitration or mediation may be
done by independent individuals or institutions like a court or government
agency like the drug controller mediating between pharmaceutical
companies and their stockists.
12.10
SUMMARY
The role of distribution is getting a product to its target market. A
distribution channel carries out this assignment with middlemen
performing some tasks. A middleman is a business firm that renders
services directly related to the purchase and/or sale of a product as it flows
from producer to consumer. Middlemen can be eliminated from a channel,
but someone still has to carry out their essential functions. A distribution
channel is the set of people and firms involved in the flow of title to a
product as it moves from producer to ultimate consumer or business user.
A channel includes producer, final customer, and any middlemen that
participate in the process.
Designing a channel of distribution for a product occurs through a
sequence of four decisions: delineating the role of distribution within the
marketing mix; selecting the proper type of distribution channel;
determining the appropriate intensity of distribution; and choosing specific
channel members. A variety of channels are used to distribute consumer
goods, business goods, and services. Numerous factors need to be
considered in selecting a distribution channel. The primary consideration
is the nature of the target market. Others relate to the product, the
middlemen, and the company itself. Because of deficiencies in conventional
channels, vertical marketing systems have become widespread in
distribution.
22
Firms that distribute goods and services sometimes clash. There are
two types of conflict: horizontal (between firms at the same level of
distribution) and vertical (between firms at different levels of the same
channel). The firms comprising a particular channel are served best if they
all view their channel as a partnership requiring coordination of
distribution activities.
12.11
KEYWORDS
Channel of distribution: The complete sequence of marketing
organisations involved in bringing a product from the manufacturer to the
ultimate consumer.
Merchant intermediary: An intermediary who takes the title of the
product such as wholesaler or retailer.
Agent intermediary: An intermediary who does not owns a title. He
only brings together the sellers and buyers.
Vertical marketing system: A network of vertically aligned
organisations that are professionally managed and all the activities of all
the intermediaries move in the same direction.
Franchise: It is a type of contractual agreement between an original
manufacturer and a franchise by which the franchisee distributes the
franchisor’s product.
Channel conflict: When there is a kind of dispute between
distribution channel members.
12.12
SELF ASSESSMENT QUESTIONS
1.
What do you mean by marketing channel? Discuss in brief the
functions and flows in marketing channel.
23
2.
Discuss in brief the concept of ‘Vertical Marketing System’ wit
suitable examples.
3.
Write in brief the causes of channel conflict, its type and
methods to minimise it.
4.
Write a detailed not on the reasons for emergence of channels
of distribution.
5.
“You can eliminate middlemen, but you cannot eliminate
essential distribution activities”. Elaborate.
12.13
REFERENCES/SUGGESTED READINGS
1.
Marketing Channels (PHI)
— Louis W. Stern, Adel I. El-Ansary, Anne T. Coughlan
2.
Fundamentals of Marketing (McGraw Hill)
—William J. Stanton, Michael J. Etzel, Bruce J. Walker
3.
Marketing Management (PHI)
— Philip Kotler
4.
Marketing Management (Tata McGraw Hill)
— Rajan Saxena
5.
Marketing Management (Macmillan)
— VS Ramaswamy, S Namakumari
24
LESSON-13 MARKETING ORGANISATION AND
CONTROL
STRUCTURE
13.0 Objective
13.1 Organising marketing department
13.1.1
Company wide organisation
13.1.2
Organisation within marketing department
13.2 Marketing Control
13.2.1
Marketing Control Process
13.2.2
Significance of marketing control
13.2.3
Problems in controlling marketing activities
13.3 Types of marketing control
13.3.1
Annual-Plan Control
13.3.2
Profitability control
13.3.3
Efficiency control
13.3.4
Strategic control
13.4 Summary
13.5 Keywords
13.6 Self Assessment Questions
13.7 References/Suggested Readings
13.0 OBJECTIVE
Marketing management process has three major phases, namely
planning, implementation, and control. Planning tells us what to do?
Implementation tells us how to do it? And, control finds out how well the
organisation is achieving the objectives.
1
Planning
Implementation
Control
Analyse Situation
Organise
Compare
Set Goals
Staff
performance
Select Strategies & Tactics
Operate with goals
There is a close relationship among planning, implementation, and
control. Organising is an important task of-implementation. This lesson
focuses on organisation and control, the two vital tasks of marketing
management.
13.1 ORGANISING MARKETING DEPARTMENT
After setting a company’s marketing plans, an early activity is to
organise the people who will be implementing it. This involves first defining
the relationship between marketing and the other functional divisions of
the firm.
Then, within the marketing department, management must design
an organisation that will implement the plans. This calls for developing a
proper marketing structure as part of organisational structure for the
whole organisation.
Organisational structures are receiving attention increasingly in the
companies now-a-days, as companies have started recognising that
yesterday’s structures may not be suitable for smooth operations in today’s
dynamic environment. Companies are streamlining their organisations by
reducing the number of executive levels between the workers and the CEO.
To stimulate innovation, to reduce office bureaucracy, and to generate
faster responses to market changes, firms are granting more authority to
middle level executives in decentralised locations. These changes show that
firms today demand an organisational flexibility to respond quickly in a
dynamic and information-driven marketing environment characterized by
2
diversity and turbulence. Undoubtedly, new organisation structures will
continue to emerge in response to changing environments.
13.1.1
Company wide organisation
Main aim of organisational structure is to establish effective working
relationships between marketing and each one of the other major
functional areas. Marketing can help production by providing accurate
sales forecasts. Production can return the favour with desired quality
products at right time. Similarly, marketing and finance people can work
together to establish pricing and credit policies. The entire company,
therefore, is divided on the basis of different functional areas like
marketing, production, finance, and personnel etc. All these areas are
equal in importance and each one is headed by a vice-president who report
to the President/CEO/Managing director of the company. These functional
areas are then bifurcated on the basis of sub-areas or tasks.
13.1.2
Organisation within marketing department
Within the marketing department, especially in medium-sized or
large firms, three forms of specialisation: geographic, product, or customer
types are used(i) Geographic spread- Probably the most widely used method of
organising marketing activities is on the basis of geographic spread. In this
3
type of arrangement, each sales person is assigned a specific geographic
area, called territory, in which to sell. Several sales people representing
contiguous territories are placed under a territorial sales executive, who
reports directly to the regional sales manager. Regional sales managers
report to general sales manager who in turn report to Vice-President
marketing.
A geographical organisation usually ensures better implementation
of marketing and sales strategies in each local market and better· control
over the sales force. Customers can be served quickly and effectively, and
local sales representatives can respond better to competitors’ actions in a
given territory. As its major drawback, a geographic organisation does not
provide the product expertise or other specialised knowledge that some
customers may want. It also adds to costs, as more and more people are
4
required to represent different cities or districts. Control and coordination
also becomes difficult sometimes.
(ii) Product specialisation- Another basis for organising the marketing
department is product specialisation.
In this kind of structure the company may divide its products into
separate product lines. Every product line is handled by separate
product/brand manager and his sales force. This type of organisation is
best suited for the companies that are marketing:
•
Complex technical products.
•
Unrelated or dissimilar products.
•
Thousands of items.
The main advantage of product specialised marketing organisation
is the attention that each product line can get from the sales force. A
drawback is that more than one sales representative from the same
company may call on the same customer. This duplication is not only
costly, but may also irritate customers.
5
(iii) Customer specialisation-
Many companies organise their
marketing departments on the basis of customer specialisation.
Customers may be grouped by type of industry or channel of distribution.
As more companies fully implement the marketing concept, the
customer specialisation type of organisation is likely to increase. Certainly
the basis of customer specialisation is commensurate with the customer
oriented philosophy that underlines the marketing concept. Here the
organisational emphasis is on customers and markets rather than on
products.
A variation of customer specialisation is the major accounts
organisation. Many companies are adopting this structure as a better way
to deal with large, important customers. A major accounts organisation
usually involves team selling. In this kind of arrangement, a selling team
consisting perhaps of a sales representative, a sales engineer, a financial
executive, and a manufacturing person will negotiate with a buying team
from the customers’ organisation.
13.2 MARKETING CONTROL
In order to achieve marketing objectives as well as organisational
objectives, marketing managers must effectively control marketing efforts.
Marketing Control is gathering information on marketing performance and
6
comparing the achieved performances against planned or budgeted
performances using predetermined standards and yardstick. It is the
process of taking steps to bring actual results & desired results closer
together.
13.2.1
Marketing Control Process
There are both formal and informal control systems in organisations.
The formal marketing control process consists of establishing performance
standards; evaluating actual performance by comparing it with established
standards and reducing the difference between-the desired and actual
performance. The informal control process, however, involves self-control,
social or group control, and cultural control through acceptance of a firm’s
value system. Given below are the steps involved in a formal marketing
control process:
(1)
Establishing
performance
standards-The
performance
standards are parameters of expected performance against which the
actual marketing performance is gauged and evaluated. These can be
quantitative or qualitative in nature. Quantitative standards could be sales
volume, profit or expenses per product etc. and qualitative standards could
be consumer satisfaction, dealer relations, brand image etc. Most common
types of marketing performance parameters are:
(a)
Sales oriented performance
(b)
Contribution to profits
(c)
Budgeted costs
(d)
Market support performance
(a)
Sales
Oriented
Performance-
These
standards
performance in term of sales volume and market share.
7
specify
(b)
Contribution to Profits- Profit contribution requires marketing
managers to consider both the costs and sales directly attributable to
marketing activity.
(c)
Budgeted costs- Budgets are developed to anticipate the
amounts needed. At the same time, expected costs for each item in the
budget also establish standards for cost performance.
(d)
awareness,
Market Support- The advertising communication objectivesattitude
change,
purchase
intentions
and
customer
satisfaction- are kinds of market SUPP0l1 objectives.
(2)
Appraising the performance- Performance appraisal calls for
collecting and collating the information about performance, analysing it
and relating it to the standards with a view to trace deviations and lapses,
if any, and the cause thereof. Such appraisal may be continuous or
periodic.
(3)
Correcting deviations- It is the performance appraisal that
reveals the deviations or variations from the standard performance or the
planned course of action. These deviations can be favourable or
unfavourable. Favourable deviations are acceptable deviations as actual
performance is better than the planned one. Unfavourable deviations, on
the other hand, are unacceptable deviations as they indicate bitter
performance, i.e., less than desired.
(4)
Reforming the plan- The final phase of marketing control
process is reformulating the plan on the basis of the inputs provided by
the marketing information system on the actual marketing performance
and its analysis and evaluation. For instance, if every time there is
favourable or unfavourable variances; it means that standards are too low
or too high where equalisation has not been brought about in terms of zero
deviations. Such feed-back of facts and analysis makes the marketing
personnel much alert and wiser about relevance and effectiveness of
8
policies, strategies, targets arid resources on the one hand and their
practical application on the one hand and their practical application on
the other.
13.2.2
Significance of marketing control
Marketing control means monitoring and realigning the marketing
effort.
(1)
It puts the unit on the progress path- A well designed and
strictly implemented marketing control system aids the management in
tracing the deviations from the chartered course. It monitors the
variations- favourable or unfavourable- and redress, the mechanism before
it gets too late. Hence marketing control puts every organisation on the
progress path.
(2)
It helps in locating responsibility for deeds- Marketing
control helps the marketing manager in particular and the top
management in general, in locating the responsibility for the deeds of
subordinates- both good and bad.
(3)
Keep pace with environmental changes- Continuous and
consistent monitoring of marketing performance is an attempt to match
the marketing efforts to the ever changing environmental forces such as
social, economic, political, cultural, ecological and technological.
(4)
It absorbs organizational complexity- The outstanding
feature of modern business enterprises is that it is going mammoth in size
and more complex in nature. Marketing control helps in reducing the
complexity of operations and actions.
(5)
It brings about realistic reformulation of plans- A well
developed and effectively operated marketing system is capable of turning
9
the intelligent management wiser than ever before through the acid tests
of cold facts.
13.2.3
Problems in controlling marketing activities
When marketing managers attempt to control marketing activities,
they frequently run into several problems. Often the information required
to control the marketing activities is unavailable or is available only at a
high cost. Effective marketing control also hinges on the quantity and
quality of information and the speed at which it is received. If the flow of
information is not rapid enough or the processing is faulty, marketing
manager will not be able to quickly detect the difference between the actual
and the planned level of performances.
13.3 TYPES OF MARKETING CONTROL
Types of
control
Prime
responsibility
Purpose of
Control
Approaches
Annual Plan Top
control
management,
Middle
management
To examine
whether the
planned results
are being
achieved
• Sales analysis
• Market share analysis
• Expense-to-sales
analysis
• Financial analysis
• Market-based score
card analysis
Profitability
control
Marketing
controller
To examine
where the
company is
making and
losing money
Profitability by:
Product, Territory,
Customer, Segment,
Trade channels, order
size
Efficiency
control
Line and staff
management,
Marketing
controller
To evaluate and
improve the
spending
efficiency and
impact of
marketing
expenditures
Efficiency of: •
Sales force
• Advertising
• Sales promotion
• Distribution
10
Strategic
control
13.3.1
Top
management,
Marketing
auditor
To examine
whether the
company is
pursuing its best
opportunities
with respect to
markets,
products and
channels
• Marketing
effectiveness rating
instrument
• Marketing audit
• Marketing excellence
review
• Company ethical and
social responsibility
review
Annual-Plan Control
The purpose of annual-plan control is to ensure that the company
achieves the sales, profits and other goals established in its annual plan.
The heart of annual-plan control is management by objectives. Four steps
are involved in annual plan control. First, management sets monthly or
quarterly goals. Second, management monitors its performance in the
marketplace. Third, management determines the causes of serious
performance deviations. Fourth, management takes corrective action to
close the gaps between its goals and performance. This could require
changing the action programmes or even changing the goals. Managers use
five tools to check on plan performance, sales analysis, market share
analysis, marketing expense-to-sales analysis, financial analysis, and
market-based scorecard analysis.
(A) Sales analysis- Sales analysis uses sales figures to evaluate a
firm’s current performance. It is probably the most common method of
evaluation. Marketers use current sales data to monitor the impact of
current marketing efforts. However, that information alone is not enough.
To provide useful analyses, current sales data must be compared with
forecast sales, industry sales, specific competitors’ sales or the costs
incurred to achieve the sales volume. So, sales analysis consists of
measuring and evaluating actual sales in relation to sales goals. Two
specific tools are used in sales analysis.
11
Sales-variance analysis measures the relative contribution of
different factors to a gap in sales performance. Suppose the annual plan
called for selling 5000 units of a product in the first quarter at Rs. 1.00 per
unit, or Rs. 5000. At quarter’s end, only 4000 units were sold at Rs. 80
per unit, or Rs. 3200. The sales performance variance is Rs. 1800 or 36%
of expected sales. The question arises, how much of this underperformance
is due to the price decline and how much to the volume decline? The
following calculation answers the question:
Variance due to price decline= (1.00- .80)(4000)=Rs. 800 =44.4%
Variance due to volume decline= (1.00)(5000- 4000) (323)=Rs. 1000
= 55.6%
Total = Rs. 1800 = 100.0%
Almost 56% of the sales variances are due to a failure to achieve the
volume target. The company should look closely at why it failed to achieve
its expected sales volume.
Microsales analysis looks at specific products, territories and so forth
that failed to produce expected sales. Suppose, in the above example, the
company sells in 3 territories and expected sales are 2000 units, 2500
units, and 500 units respectively adding upto 5000 units. The actual sales
volume was 1500 units, 2400 units, and 100 units, respectively. Territory
I shows a 25% shortfall in terms of expected sales, territory 2 shows a 4%
shortfall, and territory 3 shows a 80% shortfall. It means territory 3 is
causing most of the trouble hence sales manager should check territory 3
to find out the trouble.
(B) Market share analysis- Company sales do not reveal how well
the company is performing relative to competitors. For this purpose,
management needs to track its market share. Managers must carefully
interpret market share movements by product line, customer type, region
12
and other breakdowns. A useful way to analyze market share movements
is in terms of four components.
Overall Market Share= Customer penetration × Customer loyalty
× Customer selectivity × Price selectivity
Where:
•
Customer penetration is the percentage of an the customers
who buy from the company.
•
Customer loyalty is the purchases from the company by its
customers expressed as a percentage of their total purchases
from all the suppliers of the same products.
•
Customer selectivity is the size of the average customer
purchase from the company expressed as a percentage of the
size of the average customer purchase from an average
company.
•
Price selectivity is the average price charged by the company
expressed as a percentage of the average price charged by all
the companies.
Now suppose the company’s market share falls during the period,
above equation provide four possible explanations. The company lost some
of its customers (lower customer penetration). Existing customers are
buying a smaller share of their total supplies from this company (lower
customer loyalty). The company’s remaining customers are smaller in size
(lower customer selectivity. The company’s price has slipped relative to
competition (lower price selectivity). By tracking these factors through
time, the company can diagnose the underlying cause of market share
changes.
Suppose at the begging of the period, customer penetration was 60%;
customer loyalty, 50%; customer selectivity, 80%; and price selectivity,
125%; and company’s market share was 30%. Suppose at the end of the
13
period the company’s market share fell to 27%. In checking, the company
finds customer penetration at $5%, customer loyalty at 50%, customer
selectivity at 75%, and price selectivity at 130%. Clearly, the market share
decline was due mainly to a loss of customers (fall in customer penetration)
who normally made larger than average purchases (fall in customer
selectivity). The manager can now investigate why these customers were
lost.
(C)
Marketing expense-to-sales analysis- Annual-plan aims to
ensure that the company is not overspending to achieve its sales goals.
The key is to watch marketing expense-to-sales ratio. Companies calculate
sales force to sales, advertising to sales, sales promotion to sales,
marketing research to sales, and sales administration to sales ratios.
Management needs to monitor these marketing expenses to sales
ratios. The period to period fluctuations in each ratio can be tracked on a
control chart. Small fluctuations in these ratios are ignored but
fluctuations outside of the normal range are a cause for concern.
(D)
Financial analysis- The expense-to-sales ratio should be
analyzed in an overall financial frame-work to determine how and where
the company is making its money. Marketers are increasingly using
financial analysis to find profitable strategies and not just sales-building
strategies. Financial analysis, actually, is used by the companies to
identify the factors that affect the company’s rate of return on net worth.
(E)
Market-based score card analysis- Companies would do well
to prepare two market-based scorecards that reflect company performance
and provide possible early warning, signals. The first, a customerperformance, scorecard, records how well the company is doing year after
year on such customer-based measures as:
•
New customers
•
Dissatisfied customers
14
•
Lost customers, etc
The
second
is
called
a
stakeholder-performance
scorecard.
Companies need to track the satisfaction of various constituencies who
have a critical interest in and impact on the company’s performance:
employees, suppliers, banks, distributors, retailers, stockholders etc.
13.3.2
Profitability control
Although sales and other annual plan analyses are critical for
evaluating the effectiveness of a marketing strategy, but they give only part
of the picture. A marketing strategy that successfully generates sales may
also be extremely costly. To obtain a clear picture, a firm must know the
marketing costs associated with a given strategy to achieve a certain sales
level. Clearly, companies need to measure the profitability of their various
products; territories, customer groups, trade channels, and order sizes.
This information will help management determine whether any products
or marketing activities should be expanded, reduced or eliminated. In
general, marketing-profitability analysis indicates the relative profitability
of different channels, products, territories or other marketing entities.
Marketing cost analysis is the crux of profitability analysis. It breaks
down and classifies costs to determine which are associated with specific
marketing activities. By comparing costs of previous marketing activities
with results generated, a marketer can better allocate the firm’s marketing
resources in the future. Marketing cost analysis lets a company evaluate
the effectiveness of an ongoing or recent marketing strategy by comparing·
sales achieved and costs incurred. By pinpointing exactly where a company
is experiencing high costs, this form of analysis can help isolate profitable
or unprofitable customer segments, products, and geographic areas.
In some organisations, personnel in other functional areas, such as
production ‘or accounting, see marketers as primarily concerned with
15
generating sales, regardless of the costs incurred. By conducting
profitability analysis, marketing managers can counter this criticism and
put themselves in a better position to demonstrate how marketing activities
contribute to generating profits.
The task of determining marketing costs is often complex and
difficult. Simply ascertaining the costs associated with marketing a
product is rarely adequate. Marketers must usually determine the
marketing costs of serving specific geographical areas, market segments or
even specific customers. The first step in determining the costs is to
examine accounting records. Most accounting systems classify costs into
natural accounts- such as rent, salaries, office supplies, and utilitieswhich are based on how the money was actually spent. Unfortunately,
many natural accounts do not help explain what marketing functions were
performed through the expenditure of those funds. It does little good; for
example, to know that Rs. 80,000 is spent for rent each year. The analyst
has no way of knowing whether the money is spent for the rental of
production, storage or sales facilities. Therefore, marketing cost analysis
usually requires some of the costs in natural accounts to be reclassified
into marketing function accounts, which indicate the function performed
through the expenditure of funds. Common marketing function accounts
are transport, storage, order processing, selling, advertising, sales
promotion, marketing research, and customer credit.
Marketing cost analysis mainly use three broad categories of costs:
direct costs, traceable common costs, and non-traceable common costs.
Direct costs are directly attributable to the performance of marketing
functions. For example, sales force salaries might be allocated to the cost
of selling a specific product item, selling in a specific geographic area or
selling to a particular customer. Traceable common costs can be allocated
indirectly, using one or several criteria, to the functions that they support.
For example, if the firm spends Rs. 80000 annually to rent space for
16
production, storage and selling, the rental costs of storage could be
detem1ined on the basis of cost per square meter used for storage. Nontraceable common costs can’t be assigned according to any logical criteria
and thus are assignable only on an arbitrary basis. Interests, taxes. and
the salaries of top management are non-traceable common costs.
The manner of dealing with these three categories of costs depends
on whether the analyst uses a full cost or a direct cost approach. When a
full cost approach is used, cost analysis includes direct costs, traceable
common costs, and non-traceable common costs. Proponents of this
approach claim that if an accurate profit picture is desired, all costs must
be included in the analysis. However, opponents point out that full costing
does not yield actual costs, because non-traceable common costs are
determined by arbitrary criteria. With different criteria, the full costing
approach yields different results. To eliminate such problems, the direct
cost approach, which includes direct costs and traceable common costs
only, is used.
Methods of marketing cost Analysis
Marketers can use several methods to analyse costs. The methods
vary in their precision. This section examines three costs analysis
methods- analysis of natural accounts; analysis of functional accounts;
and cost analysis by product, geographic area, and/or customer.
Marketers can sometimes determine marketing costs by performing
an analysis of natural accounts. The precision of this method depends on
how detailed the firm’s accounts are. For example, if accounting records
contain separate accounts for production wages, sales force wages, and
executive salaries, the analysis can be more precise than if all wages and
salaries are lumped into a single account. An analysis of natural accounts
is more meaningful, and thus more useful, when current cost data can be
17
compared with those of previous periods or with average cost figures for
the entire industry.
As indicated earlier, the analysis of natural accounts may not shed
much light on the cost of marketing activities. In such cases, natural
accounts must be reclassified into marketing function accounts for
analysis. Once the cost of the marketing functions have been determined,
the analyst is ready to compare the resulting figures with budgeted costs,
sales analysis data, cost data from earlier operating periods or perhaps
average industry cost figures, if these are available.
Although marketers usually obtain a more detailed picture of
marketing costs by analysing functional accounts than by analysing
natural accounts, some firms need an even more precise cost analysis. The
need is especially great if the firms sell several types of products, sell in
multiple geographic areas, and sell to a wide variety of customers. Activities
vary in marketing different products in specific geographic locations to
certain customer groups. Therefore the costs of these activities also vary.
By analysing the functional costs of specific product groups, geographic
areas or customer groups, a marketer can find out which of these
marketing entities are the most cost effective to serve.
13.3.3
Efficiency control
Suppose a profitability analysis reveals that the company is earning
poor profits in connection with certain products, territories or markets, it
becomes very important to find out whether there are some efficient ways
to manage the sales force, advertising, sales promotion and distribution in
connection with these poorly-performing marketing entities.
Some companies have established a marketing controller position to
assist marketing personnel in improving marketing efficiency. Marketing
controller performs a sophisticated financial analysis of marketing
18
expenditure and results. Specifically, they examine adherence to profit
plans, help prepare brand manager’s budgets, measure the efficiency of
promotions, analyse media production costs, evaluate customer and
geographic profitability, and educate marketing personnel on the financial
implications of marketing activities and decisions.
(A) Sales force efficiency- Sales managers need to monitor the
following key indicators of sales force efficiency in their territory:
•
Average number of sales calls per salesperson per day.
•
Average sales call time per contact.
•
Average revenue per sales call.
•
Average cost per sales call.
•
Entertainment cost per sales call.
•
Percentage of orders per 100 sales calls.
•
Number of new customers per period.
•
Number of lost customers per period.
•
Sales-force cost as a percentage of total sales, etc.
These indicators raise such useful questions as the following:
•
Are sales representatives making too few calls per day?
•
Are they spending too much time per call?
•
Are they spending too much on entertainment?
•
Are they closing enough orders per 100 calls?
•
Are they producing enough new customers and holding onto
the old customers?
Where a company starts investigating sales force efficiency, it often
finds areas for improvement.
(B) Advertising efficiency- Many managers feel that it is almost
impossible to measure what they are getting back for their advertising
money. There are different models or techniques that can measure the
communication as well as sales effect of advertising. Media persons feel
19
that ids a creative field and so it should not be judged quantitatively.
However, managers should try to keep track of at least the following
statistics:
•
Advertising cost per 1000 target buyers reached by media
vehicle.
•
Percentage of audience exposed to the advertisement.
•
Consumer opinions on the ad content and effectiveness.
•
Before-after measures of attitude toward the product.
•
Number of inquiries stimulated by the ad.
Management can undertake a number of steps to improve the
advertising efficiency, including positioning the product better, defining
advertising objectives, pretesting messages, using technology to guide the
selection of advertising media, looking for better media buys, and doing
advertising post testing.
(C) Sales-promotion efficiency- Sales promotion includes dozens of
devices for stimulating buyer interest and product trial. To improve salespromotion efficiency, management should record the costs and sales
impact of each sales promotion. Management should watch the following
statistics:
•
Display costs per sales rupee.
•
Percentage of coupons redeemed.
•
Number of inquiries resulting from a demonstration.
If a sales-promotion manager is appointed, that manager can analyze
the results of different sales promotions and advise product managers on
the most cost-effective promotions to use.
(D) Distribution efficiency- Management needs to search for
distribution economies. Several tools are available for improving inventory
control, warehouse locations, and transportation modes. One problem that
frequently arises is that distribution efficiency decline when the company
20
experiences strong sales increases. Management needs to identify the real
bottlenecks and invest in production and distribution capacity.
13.3.4
Strategic control
From time to time companies need to undertake a critical review of
their overall marketing goals and effectiveness. Marketing is an area where
rapid obsolescence of objectives, policies, strategies, and programmes is a
constant possibility. Each company should periodically reassess its
strategic approach to the marketplace. In this context, two tools are
available: marketing-effectiveness rating review and marketing audit.
Companies can also undertake marketing excellence reviews and
ethical/social responsibility reviews.
(A)
The
marketing-effectiveness
rating
review-
Marketing
effectiveness is not necessarily revealed by current sales and profit
performance. Good results could be due to a division’s being in the right
place at the right time, rather than having effective marketing
management. Improvements in that division’s marketing might boost
results from good to excellent.
A company’s marketing effectiveness is reflected in the degree to
which it exhibits the five major attributes of a marketing orientation:
customer
philosophy,
integrated
marketing
organization,
adequate
marketing information, strategic orientation and operational efficiency.
Each of these attributes can be measured. Every company should prepare
a marketing effectiveness rating instrument based on these attributes.
Marketing and other managers in different divisions should fill out this
instrument. The scores then can be used to interpret company’s exact
position.
(B) The marketing audit- Those companies that discover marketing
weaknesses through applying the marketing-effectiveness rating reviews
21
should undertake a more thorough study known as a marketing audit.
Audit is a term more commonly used in financial management to describe
the process of taking stock of an organisation’s financial strengths,
weakness and health, through checking and analysing changes in its
assets and transactions over a given period. The philosophy of the
marketing audit is very similar, in that it systematically takes stock of an
organisation’s marketing health.
According to McDonald, “The audit is the means by which a company
can understand how it relates to the environment in which it operates. It
is the means by which a company can identify its own strengths and
weaknesses as they relate to external opportunities and threats. It is thus
a way of helping management to select a position in that environment
based on known factors.” Philip Kotler defines marketing audit as, “a
comprehensive,
systematic,
independent
and
periodic
review
and
evaluation of a company’s- or business unit’s- marketing environment,
objectives, strategies, philosophies, and activities with a view to
determining problem areas and opportunities and recommending a plan of
action to improve the company’s marketing performance.”
Characteristics of marketing audit
Let us examine a few characteristics of marketing audit.
(i)
Comprehensive- The marketing audit covers all the major
marketing activities of a business, not just a few trouble spots.
(ii)
Systematic- The marketing audit involves an orderly sequence
of diagnostic steps covering the organisation’s macro and micro marketing
environment, marketing objectives and strategies, marketing systems, and
specific
marketing
activities.
The
diagnosis
indicates
the
needed
improvements. They are incorporated in a corrective action plan involving
both short run and long run steps to improve the organisation’s overall
marketing effectiveness.
22
(iii)
Independent- A marketing audit can be conducted in six ways:
self audit, audit from across, audit from above, company auditing office,
company task force audit, and outsider audit. Generally speaking, the best
audits are likely to come from outside consultants who have the necessary
objectivity, broad experience, and time and attention.
(iv)
Periodic- Typically, marketing audits are initiated only after
sales have turned down, sales force morale has fallen, and other problems
have occurred. Ironically, companies are thrown into a crisis partly
because they fail to review their marketing operations during good times.
A periodic marketing audit can benefit companies in good as well as
troubled times.
Marketing audit process
The marketing audit stats with a meeting between the company
officers and the marketing auditors to work out an agreement on the
audit’s objectives, coverage, depth, data sources, report format, and time
frame. A detailed plan (who is to be interviewed, the questions to be asked,
the time and place of contact, and so on) is carefully prepared so that
auditing time and cost are kept to a minimum. Opinions of managers,
dealers, retailers, and customers are taken in data gathering phase. After
this
the
marketing
auditor
presents
the
main
findings
and
recommendations.
The marketing audit examines six major components of the
company’s marketing situation. They are:
•
Marketing Environmental audit
•
Marketing Strategy audit
•
Marketing organization audit
•
Marketing system audit
•
Marketing productivity audit
•
Marketing function audit
23
(C)
The marketing excellence review- Companies can use
another instrument to rate their performance in relation to the best of
practices of high performing business. There can be poor, good and
excellent business and marketing practices.
Poor
Good
Excellent
Product driven
Market driven
Market driving
Mass market oriented
Segment oriented
Niche/customer
oriented
Product offer
Augmented product
Customer solutions
offer
offer
Average product
quality
Better than average
Legendary
Average service quality
Better than average
Legendary
Function oriented
Process oriented
Outcome oriented
Supplier exploitation
Supplier preference
Supplier partnership
Dealer exploitation
Dealer support
Dealer partnership
Price driven
Quality driven
Value driven
Hierarchy
Network
Teamwork
Vertically integrated
Flattened organisation
Strategic alliances
Stockholder driven
Stockholder driven
Societal driven
With the help of this table management can check where their
business stands. The resulting profile then exposes the business’s
weaknesses and strengths. It also highlights where the company might
move to become a truly outstanding player in the marketplace.
(D)
The ethical and social responsibility review: Companies
need to evaluate whether they are truly practicing ethical and socially
responsible marketing. Business success and continuously satisfying the
customer and other stakeholders are intimately tied to adoption and
implementation of high standards of business and marketing conduct. The
24
most admired companies in the world abide by the code of serving people’s
interests, not only their own.
The practices of business ‘are often under attack because business
situations routinely pose tough dilemmas as to what is right. To handle
these situations, three pronged attack is needed. First, society must use
the law to define, as clearly as possible, those practices that are illegal,
anti-social, or anti-competition. Second, companies must adopt and
disseminate a written code of ethics, build a company tradition of ethical
behaviour, and hold their people fully responsible for observing the ethical
and legal guidelines. Third, individual marketers must practice a ‘social
conscience’ in their specific dealings with customers and various
stakeholders.
13.4 SUMMARY
Planning and control is central to marketing management.
Marketing plans do not develop by accidents, so it is essential that an
organisation has a structure that facilitates the development of a strategy
and
its
implementation.
Numerous
approaches
to
improve
the
effectiveness of an organisation’s marketing implementation have been
discussed in the previous chapters.
When it comes to organisation, management must design an
organisation that will implement the plan. This calls for developing a
proper marketing structure as a part of organisational structure. Main aim
of organisational structure is to establish effective working relationships
between marketing and each one of the other major functional areas.
In order to achieve marketing objectives as well as organisational
objectives, marketing managers must effectively control marketing efforts.
This process involves gathering information on marketing performance and
comparing
the
achieved
performances
25
against
the
onesusing
predetermined yardsticks. It can be done through annual plan control,
profitability control, and efficiency control etc.
13.5 KEYWORDS
Sales-oriented
performance:
These
standards
specify performance in terms of sales volume and market share.
Budgeted costs: Budgeted costs are developed to anticipate the
amounts needed.
Efficiency control: To evaluate and improve the spending efficiency
and impact of marketing expenditure.
Strategic control: To examine whether the company is pursuing its
best opportunities with respect to markets, products and channels.
Marketing audit: The audit is the means by which a company can
understand how it relates to the environment in which it operates.
13.6 SELF ASSESSMENT QUESTIONS
1.
What do you understand by marketing control? Discuss its
role and significance with the help of suitable examples.
2.
What is marketing control? Discuss the various types of
marketing controls used by the companies.
3.
Write a detailed note on Annual plan control.
4.
What is profitability control? Discuss its significance for
marketing department of a company.
5.
Write a detailed note on the efficiency control.
6.
What do you understand by strategic control? Discuss the
tools of strategic control with the help of suitable example.
7.
What do you mean by marketing audit? How it is done?
Discuss with the help of a hypothetical example.
26
13.7 REFERENCES/SUGGESTED READINGS
1.
William J. Stanton, Michael J. Etzel, and Bruce J. Walker,
“Fundamentals of Marketing”, 10th Edition, McGraw Hill
International edition, 1994, pp. 596-619.
2.
Douglas J. Dalrymple, and Leonard J. Parsons, “Marketing
Management-Test & Cases”, 1st Edition, Wiley/Hamilton
Publication.
3.
Richard
H.
Buskirk,
“Principles
of
Marketing-
the
management view, 3rd Edition, Holt, Rinchard & Winston,
Inc.
4.
Ang, SH, Leong, SM, Tan, CT, and Kotler, P., “Marketing
Management- An Asian Perspective”, Prentice Hall & Simon &
Schuster (Asia) Pvt. Ltd., Singapore, 1996, pp. 940-972.
5.
Brassington, F., and Pettitt, S., “Principles of marketing”,
Pitman Publishing, London, 1997,pp.875-916.
6.
Dibb, S., Simkin, L., Pride, WM, and Ferrell, DC, “Marketingconcepts & strategies”, 2nd European edition, Houghton Mifflin
Company, London, 1994, pp.584-611.
27
LESSON-14 NEW ISSUES IN MARKETING:
GLOBALIZATION, CONSUMERISM, GREEN
MARKETING AND LEGAL ISSUES
STRUCTURE
14.0 Objective
14.1 Introduction
14.2 Globalization
14.2.1 Being International
14.2.2 Determining the Level of International Involvement
14.3 Green marketing
14.3.1 What is Green Marketing?
14.3.2 Why is green Marketing Important?
14.3.3 Why are Firms Using Green Marketing?
14.3.4 Some problems with going green
14.4 Consumerism
14.4.1 Consumer Protection Act
14.4.2 Scope of the Consumer Protection Act, 1986
(COPRA, 1986)
14.4.3 Consumer Protection Council
14.4.4 Objectives of the Central Council
14.4.5 State Consumer Protection Councils
14.4.6 Consumer Disputes Redressal Agencies
14.5 Summary
14.6 Keywords
14.7 Self Assessment Questions
14.8 References/Suggested Readings
1
14.0 OBJECTIVE
The basic objective of this lesson is to make the students familiar
with the emerging issues in marketing like globalisation, consumerism,
green marketing etc., and its impact on marketing efforts of any
organisation.
14.1 INTRODUCTION
You might have studied marketing in earlier chapters and you might
be aware that consumer is the king in modern marketing concept. Entire
marketing revolves around one thing, and that is consumer Needs. All the
marketing efforts are directed toward identifying unmet and new emerging
consumer needs so that a planned effort could be made to meet those. But
one thing must be born in mind here that Needs and their satisfiers (wants)
are always shaped by surrounding be it culture, society, family, work group
or the like. Any change in surroundings will affect the need and
consumption pattern of consumer. Recent time has been the era of change.
In order to understand their impact on marketing, any serious student of
marketing needs to understand these changes.
14.2 GLOBALIZATION
One such change and challenge is globalization. There is multiplicity
of factors that has led to globalization. We can study some of these are:
Staturating markets in developed Economics
Towards the end of 20th century most of the leading economics were
facing the problem of saturating markets as most of the technological
developments except for in software industry, had already taken place and
not many innovative products were willing the markets. So firms in these
economics started looking for growing markets in developing economics
2
and they started moving out in search of newer markets which added to
the pace of Globalization.
Inter Connectivity
With the advent of internet, cable television and mobile telephone the
world started getting connected as never before which almost converted
worked into one Global village where cultural social and economic
boundaries were eliminating fast.
New world Order under WTO
With the term of century the world economic proves had understood
that world is to grow them economic boundaries have to go. All the nations
including the developing one will grow if trade are to be made free. Under
WTO, the economic restrictions will become history very soon.
So under changed circumstances where whole world will be one
economy the companies need a fresh thinking as how to operate and
compete in new world under. And one key thing would be to go global.
But why would a company at all be willing to go global?
May be because;
(i)
it can outsource the inputs from across the world at much
cheaper rate and of better quality
(ii)
firms wants to get move economics of scale by producing at a
larger scale by attracting much bigger market across the
national boundaries
(iii)
firm are facing staff competition their own markets from global
firms and they wish to compete with them in their markets
(iv)
firm wants to meet better opportunity offered elsewhere
(v)
firm want to earn the reputation of being a global firm
(vi)
to expand and grow is in human nature
3
But a firm would like to see a few things before thinking of crossing
the national boundaries:
(i)
Consumer’s behaviour of the market it intends to enter
(ii)
Opportunities available and resultant threats
(iii)
Economic conditions and business culture of the countries it
intend to enter into
(iv)
14.2.1
Legal formalities and competition
Being International
Once a company decides to go global, it has to decide the degree of
marketing involvement and commitment. Their decision should be
reflected considerable study and analysis of market potential and company
capabilities- a process not always followed. Many companies begin
tentatively in international marketing, growing as they gain experience and
gradually changing strategy and tactics as they- become more committed.
Others enter international marketing after much research and with fully
developed long-range plans, prepared to make investments to acquire a
market position.
Stages of International Marketing Involvement
Regardless of the means employed to gain entry into a foreign
market, a company may, from a marketing viewpoint, make no market
investment- that is, its marketing involvement may be limited to selling a
product with little or no thought given to development of market control.
Or a company may become totally involved and invest large sums of money
and effort to capture and maintain a permanent, specific share. of the
market. In general, one of five but overlapping stages can describe the
international marketing involvement of a company. Although the stages of
4
international marketing involvement are presented here in a linear order,
the reader should not infer that a firm progresses from one stage to
another; quite to the contrary, a firm may begin its international
involvement at anyone stage or be in more than one stage simultaneously.
For example, because of a short product life cycle and a thin but
widespread market for many technology products, many hightech
companies large and small see the entire world, including their home
market, as a single market and strive to reach all possible customers as
rapidly as possible. Let us discuss these stages one by one. No Direct
Foreign Marketing
A company in this age does not actively cultivate customers outside
national boundaries; however, this company’s products may reach foreign
markets. Sales may be made to trading companies as well as other foreign
customers who come directly to the firm. Or products reach foreign
markets via domestic wholesalers or distributors who sell abroad on their
own without explicit encouragement or even knowledge of the producer. As
companies develop web pages on the Internet, many receive orders from
international “web surfers”. Often an unsolicited order from a foreign buyer
is what piques the interest of a company to seek additional international
sales.
Infrequent Foreign Marketing
Temporary surpluses caused by variations in production levels or
demand may result in infrequent marketing overseas. The surpluses are
characterized by their temporary nature; therefore, sales to foreign markets
are made, as goods are available, with little or no intention of maintaining
continuous market representation. As domestic demand increases and
absorbs surpluses, foreign sales activity is withdrawn. In this stage, there
is little or no change in company organization or product lines. Few
companies today fit this model as customers seek long-term commitments
and there are companies that offer this option.
5
Regular Foreign Marketing
At this level, the firm has permanent productive capacity devoted to
the production of goods to be marketed on a continuing basis in foreign
markets. A firm may employ foreign or domestic overseas middlemen or it
may have its own sales force or sales subsidiaries in important foreign
markets. The primary focus of operations and production is to service
domestic market needs. However, as overseas demand grows, production
is allocated for foreign markets al1d products may be adapted to meet the
needs of individual foreign markets. Profit expectations move from being
seen as a bonus to regular domestic profits to the position where the
company becomes dependent on foreign sales and profits to meet its goals.
International Marketing
Companies at this stage are fully committed and involved in
international marketing activities. Such companies seek markets all over
the world and sell products that are a result of planned production for
markets in various countries. This generally entails not only the marketing
but also the production of goods outside the home market: At this point a
company becomes an international or multinational marketing firm.
The experience of Feeders, a manufacturer of room air-conditioners,
typifies a company that begins its international business at this stage.
Even though it is the largest manufacturer or airconditioners in the United
States, the firm faced constraints in its domestic market. Its sales were
growing steadily but air-conditioner sales (the company’s only product) are
seasonal and thus there are time when domestic sales do not even cover
fixed costs. Furthermore, the U.S. market is mature, with most customers
buying only replacement units. Any growth would have to come from a
rival’s market share and the rivals, Whirlpool and Matsushita, are
formidable. Feeders decided that the only way to grow was to venture
abroad.
6
Feeders decided that Asia, with its steamy climate and expanding
middle class, offered the best opportunity. China, India, and Indonesia
were seen as the best prospects. China was selected because sales of room
air-conditioners had grown from 500,000 units to over 4 million in five
years, which still accounted for only 12 percent of the homes in cities like
Beijing, Shanghai, and Guangzhou. The company saw China as a market
with terrific growth potential. After careful study, Fedders entered a joint
venture with a small Chinese air-conditioner company that was also
looking for a partner and a new company, Fedders Xinle, was formed. They
immediately found that they needed to redesign their product for this
market. In China air-conditioners are a major purchase seen as a box to
keep a room cool as in the U.S. The Chinese also prefer a split-type-airconditioner, the unit containing the fan inside the room and the heat
exchanger mounted on a wall outside. Since Fedders did not manufacture
split models, it designed a new product that is lightweight, energy-efficient,
and packed with features such as a remote control and an automatic airsweeping mechanism. The joint venture appears to be successful, and the
company is exporting the possibility of marketing to other Asian markets
and Japan and may be even back to the United States with a new product
that it developed for the China market. As Fedders expands into other
markets and makes other commitments internationally, it continues to
evolve as an international or multinational company. The company may
remain at this stage, as most companies do, or go through a change in
orientation and become a global company.
Global Marketing
At the global marketing level, the most profound change is the
orientation of the company toward markets and its planning. At this stage,
companies treat the world, including their home market, as one market. In
contrast to the multinational or international company that views the world
as a series of country markets (including their home market) with unique
7
sets of market characteristics for which marketing strategies must be
developed, a global company develops a strategy to reflect the existing
communities of market needs among many countries to maximize returns
through global standardization of its business activities- whenever it is cost
effective and culturally possible. The entire operations, its organisation
structure, sources of finance, production, marketing, and so forth, take on
a global perspective.
Perhaps the former president of Coca-Cola, Roberto Goizueta, put it
most simply and succinctly when he said, “The culture of The CocaCola
Co. has moved from being an American company doing business
internationally to an international company that happens to be
headquartered in Atlanta. This change is pervasive throughout our
organisation. If you go back to our 1981 annual report, you will see
references to ‘foreign’ sales or ‘foreign’ earnings. Today, the word foreign is
‘foreign’ to our corporate language. He went on to say that Coke had been
global before global was fashionable.
International operations of businesses in global marketing reflect the
heightened competitiveness brought about by the globalization of markets,
interdependence of the world’s economies, and the growing number of
competing firms from developed and developing countries vying for the
world’s markets. Global companies and global marketing are terms
frequently used to describe the scope of operations and marketing
management orientation of companies at this stage.
14.2.2
Determining the Level of International Involvement
Consider several options when deciding how to enter a foreign
market. When analyzing the options, keep in mind the nature of the
product being sold, the environment of the market being considered, and
the financial, physical, and managerial resources your company is willing
to commit to the endeavour. Exporting represents the lowest level of
8
commitments; direct investment represents the highest level. Between the
extremes are foreign licensing and joint ventures.
Manufacturers often enter foreign markets by exporting. This
enables them to test a market with small shipments before investing in
expanded production capabilities or foreign manufacturing facilities.
Service businesses, such as restaurants, hotels or car rental agencies,
usually enter a foreign market through a licensing arrangement, joint
venture, or direct investment in foreign facilities. Let us discuss the various
modes of entering foreign markets one by one.
Exporting: The low-risk approach to international marketing is
exporting that explains why approximately 100,000 companies in the
United States are involved at that level. However, of the 100,000 only 3,600
companies average over 4,400 shipments a year. Around 9,900 companies
average approximately tt5 shipments a year. The remaining 86,500 average
only 9 export shipments a year.
Two basic approaches can be taken to exporting. Indirect exporting
is handled by intermediaries such as buying or export agents who buy the
product directly from the manufacturer and then resale it overseas under
their own name. Indirect exports typically have no contact with customers
in their foreign markets. Direct exporting is handled directly by the
manufactures and requires a greater commitment of both managerial and
financial resources. One of the least risky ways to export indirectly is
through an export trading company, which buys everything from
manufactured goods to raw materials and then resells these products in
foreign markets. The manufacturer receives a guaranteed price, and the
trading company assumes all the risk.
However, “to rake in the really big bucks you’ve got to get involved
directly,” says James Yoder, president of Beauty Products International
(BPI), of Malibu, California. Experts said that the only way to crack the
9
Japanese market was to sell through a large Japanese trading company (or
wholesaler). However, Yoder went directly to the retailers and successfully
arranged a deal with a major retail chain. The retailer sells BPI’s products
at a lower price than if it were to buy similar products from a wholesaler,
but it still earns nearly double the average profit margin. As a result, BPI
products are now in over 3,500 Japanese stores, and the retailer has even
launched
an
extensive
advertising
campaign
with
national
TV
commercials.
Licensing: Licensing provides a way of selling the rights to a patent,
brand name, or expertise so that the licensee can produce or market the
product in a foreign country. Although licensing does to require large
capital outlays, it does mean that the licensing company loses a certain
amount of control over how its products are manufactured, marketed, and
distributed in a foreign market. However, it does offer a viable alternative
for companies to sell internationally with a minimum amount of risk.
For example, Selma Weiser founded Charivari, a chain of avantgrade boutiques on Manhattan’s Upper West Side. She licensed the
Charivari name to a Japanese manufacture and retailer that own 500
menwear stores; in return, Weiser is paid a yearly royalty and a percentage
of sales.
One of the fastest-growing forms of international licensing is
franchising. There are now over 30,000 franchises in foreign countries for
such U.S. companies as KFC and Coca-Cola. Although franchising enables
a company to expand quickly in foreign markets, it is not a trouble free
way to market internationally. One problem with international franchising
is that it is sometimes more difficult to evaluate potential franchisees in a
foreign environment. Another problem is that it can also provide the foreign
franchisee with an opportunity to gain valuable expertise that can be used
later to compete against the franchising company in the same market. The
best way for a franchising company to protect itself is to thoroughly
10
investigate
potential
franchisees
and
regularly
monitor
franchise
operations.
Joint Venture: A joint venture involves shared ownership between
a local and foreign company. Because many countries- such as Japan and
South Korea will not allow 100 percent ownership of foreign investment
ventures, a joint venture is sometimes the only way for a company to
produce and market in a foreign country. Even the National Basketball
Association is going international. In a recent joint venture with a Japanese
partner, the NBA will develop television programming and play basketball
games in Japan.
Joint ventures with Japanese and South Korean companies haven’t
always worked to the benefit of the U.S. companies involved. Two big
complaints are that the foreign partner uses the joint venture as a way to
learn new technologies and gain access to the U.S. market, not to cooperate
in a mutually beneficial manner. However, experts point out that these
partnerships can work if U.S. companies pay attention to several important
points. First, companies need to understand that partnership in a joint
venture should be interpreted as competition, just competition in a new
and different form. An overseas partner may still be a competitor, but both
companies can benefit if each pursues its strategic goals and’ doesn’t forget
the strategic reason for being in the partnership. This also means giving
away much knowledge as the agreement requires, but no more. Second,
harmony doesn’t always indicate a successful joint venture; the true
measure of success is whether both players reach their goals. Third, keep
in mind that learning from the other company is one other major reason
for being in the alliance. If that’s not happening, the partnership isn’t
working.
Direct Investment: The highest level involvement in international
marketing is direct investment, in which companies invest directly in a
foreign market to acquire ownership interests in local companies or to
11
establish their own foreign production and marketing facilities- which
enables them to maintain maximum control over international operations.
U.S. corporations spend billions of dollars building and upgrading factories
aboard and foreign concerns put comparable amounts into their operations
in the United States.
From the U.S. government’s perspective, one of the problems with
direct investment by U.S. companies is that it does nothing to help the
nation’s trade deficit; goods produced and sold abroad don’t enter into
trade figures. Nonetheless, many companies are setting up factories abroad
in order to avoid import quotas and other trade barriers. Some companies
are more concerned about the wide swings in the value of the dollar, and
they see direct investment as a way to minimize the risk of locating all their
operations in the United States.
Manufacturing concerns are not the only companies buying into
foreign markets, however. According to data collected by the United
Nations, service businesses account for nearly half of all direct investment
in developed countries, and services are the fastest-rising component of
investment everywhere. Federal Express, for example, invested in four
transport companies in Japan. Even research and development is going
international. Several companies, including Upjohn, Du Pont, and
Eastman Kodak, recently built R&D centers in Japan so that they can tap
the brain power of Japanese scientists.
14.3 GREEN MARKETING
Although environmental issues influence all human activities, few
academic disciplines have integrated green issues into their literature. This
is especially true of marketing. As society becomes more concerned with
the natural environment, businesses have begun to modify their behaviour
in an attempt to address society’s “new” concerns. Some businesses have
been quick to accept concepts like environmental management systems
12
and waste minimization, and have integrated environmental issues into all
organisational activities. Some evidence of this is the development of
journals such as “Business Strategy and the Environment” and “Greener
Management International”, which are specifically designed to disseminate
research relating to business’ environmental behaviour.
One business area where environmental issues have received a great
deal of discussion in the popular and professional press is marketing.
Terms like “Green Marketing” and “Environmental Marketing’ appear
frequently in the popular press. Many governments around the world have
become so concerned about green marketing activities that they have
attempted to regulate them. For example, in the United States (US) the
Federal Trade Commission and the National Association of AttorneysGeneral have developed extensive documents examining green marketing
issues. One of the biggest problems with the green marketing area is that
there has been little attempt to academically examine environmental or
green marketing. While some literature comes exist, it comes from
divergent perspectives.
14.3.1
What is Green Marketing?
Unfortunately, a majority of people believe that green marketing
refers solely to the promotion or advertising of products with environmental
characteristics. Terms like Phosphate Free, Recyclable; Refillable, Ozone
Friendly, and Environmentally Friendly are some of the things consumers
most often associate with green marketing. While these terms are green
marketing claims, in general green marketing is a much broader concept,
one that can be applied to consumer goods, industrial goods and even
services. For example, around the world there are resorts that are
beginning to promote themselves as “ecotourist” facilities, i.e., facilities
that “specialize” in experiencing nature or operating in a fashion that
minimizes their environmental impact.
13
Thus green marketing incorporates a broad range of activities,
including product modification, changes to the production process,
packaging changes, as well as modifying advertising. Yet defining green
marketing is not a simple task. Indeed the terminology used in this area
has varied, it includes- Green Marketing Environmental Marketing and
Ecological Marketing, while green marketing came into prominence. In the
late 1980s and early 1990s, it was first discussed much earlier. The
American Marketing Association (AMA) held the first workshop on
“Ecological Marketing” in 1975. The proceeding of this workshop resulted
in one of the first books on green marketing entitled “Ecological Marketing”.
Since that time a number of other books on the topic, have been published.
The AMA workshop attempted to bring together academics,
practitioners, and public policy makers to examine marketing’s impact on
the natural environment. At this workshop ecological marketing was
defined as the study of the positive and negative aspects of marketing
activities on pollution, energy depletion and non-energy resource depletion.
This early definition has three key components, 1) it is a subset of
the overall marketing activity; 2) it examines both the positive and negative
activities; and 3) a narrow range of environmental issues are examined.
While this definition is a useful starting point, to be comprehensive green
marketing needs to be more broadly defined. Before providing an
alternative definition it should be noted that no one definition or
terminology has been universally accepted. This lack of consistency is a
large part of the problem, for how can an issue be evaluated if all
researchers have a different perception of what they are researching. The
following definition is much broader than those of other researchers and it
encompasses all major components of other definitions. My definition is:
Green or Environmental Marketing consists of all activities designed
to generate and facilitate any exchanges intended to satisfy human needs
14
or wants, such that the satisfaction of these needs and wants occurs, with
minimal detrimental impact on the natural environment.
This definition incorporates much of the traditional components of
the marketing definition, that is, all activities designed to generate and
facilitate any exchanges intended to satisfy human needs or wants.
Therefore, it ensures that the interests of the organisation and all its
consumers are protected, as voluntary exchange will not take place unless
both the buyer and seller mutually benefit. The above definition also
includes the protection of the natural environment, by attempting to
minimize the detrimental impact this exchange has on the environment.
This second point is important, for human consumption by its very nature
is destructive to the natural environment. (To be accurate products making
green claims should state they are “less environmentally harmful” rather
than “Environmentally Friendly”. Thus green marketing should look at
minimizing environmental harm, not necessarily eliminating it.
14.3.2
Why is green Marketing Important?
The question of why green marketing has increased in importance is
quite simple and relies on the basic definition of Economics;
Economics is the study of how people use their limited resources to
try to satisfy unlimited wants.
Thus mankind has limited resources on the earth, with which
she/he must attempt to provide for the worlds’ unlimited wants. In market
societies where there is “freedom of choice”, it has generally been accepted
that individuals and organisations have the right to attempt to have their
wants satisfied. As firms face limited natural resources; they must develop
new or alternative ways of satisfying these unlimited wants. Ultimately
green marketing looks at how marketing activities utilize these limited
15
resources, while satisfying consumer wants both of individuals and
industry, as well as achieving the selling organisation’s objectives.
14.3.3
Why are Firms Using Green Marketing?
When looking through the literature there are several suggested
reasons for firms increased use of Green Marketing. Five possible reasons
are:
(i)
Organizations perceive environmental marketing to be an
opportunity that can be used to achieve its objectives.
(ii)
Organisations believe they have a moral obligation to be more
socially responsible.
(iii)
Government bodies are forcing firms to become more
responsible
(iv)
Competitors’ environmental activities pressure firms to
change their environmental marketing activities; and
(v)
Cost factors associated with waste disposal or reductions in
material usage forces firms to modify their behaviour.
14.3.4
Some problems with going green
No matter why a firm uses green marketing there are a Number of
potential problems ‘that they must overcome. One of the main problems is
that· firms using green marketing must ensure that their activities are not
misleading to consumers or industry, and do not breach any of the
regulations or laws dealing with environmental marketing. For example,
marketers in the US must ensure their green marketing claims can meet
the following set of criteria:
•
Clearly state environmental benefits;
•
Explain environmental characteristics;
•
Explain how benefits are achieved;
•
Ensure comparative differences are justified;
16
•
Ensure negative factors are taken into consideration; and
•
Only use meaningful terms and pictures
Another problem that a firm face is that those who modify their
products due to in-creased consumer concern must contend with the fact
that consumers’ perceptions are sometimes not correct. Take for example
the McDonald’s case where it has replaced its clam shells with plastic
coated paper. There is ongoing scientific debate which is more
environmentally friendly. Some scientific evidence suggests that when
taking a cradle-to-grave approach, polystyrene is less environmentally
harmful. If this is the case McDonald’s bowed to consumer pressure, yet
has chosen the more environmentally harmful option.
When firms attempt to become socially responsible, they may face
the risk that the environmentally responsible action of today will be found
to be harmful in the future. Take for example the aerosol industry which
has
switched
from
CFCs
(chlorofluorocarbons)
to
HFCs
(hydro
fluorocarbons) only to be told HFCs are also a greenhouse gas. Some firms
now use DME (dimethyl ether) as an aerosol propellant, which may also
harm the ozone layer. Given the limited scientific knowledge at any point
in time, it may be impossible for a firm to be certain they have made the
correct environmental decision. This may explain why some firms, like
Coca-Cola and Walt Disney World, are becoming socially responsible
without publicizing the point. They· may be protecting themselves from
potential future negative backlash, if it is determined they made the wrong
decision in the past.
While governmental regulation is designed to give consumers the
opportunity to make better decisions or to motivate them to be more
environmentally responsible, there is difficulty in establishing policies that
will address all environmental issues. For example, guidelines developed
to control environmental marketing address only a very narrow set of
issues, i.e., the truthfulness of environmental marketing claims. If
17
governments want to modify consumer behaviour they need to establish a
different set of regulations. Thus government attempts to protect the·
environment may resulting a proliferation of regulations and guidelines,
with no one central controlling body.
Reacting to competitive pressures can cause all “followers” to make
the same mistake as the “leader”. A costly example of this was the Mobil
Corporation who followed to competition and introduced “biodegradable”
plastic garbage bags. While technically these bags were biodegradable, the
conditions under which they were disposed did not allow biodegradation to
occur. Mobil was sued by several US states for using misleading advertising
claims.
Thus
blindly
following
the
competition
can
have
costly
ramifications.
The push to reduce costs or increase profits may not force firms to
address the important issue of environmental degradation. End-of-pipe
solutions may not actually reduce the waste but rather shift it around.
While this maybe beneficial, it does not necessarily address the larger
environmental problem, though it may minimize its short term affects.
Ultimately most waste produced will enter the waste stream, therefore to
be environmentally responsible organizations should attempt to minimize
their waste, rather than find “appropriate” uses for it.
14.4 CONSUMERISM
Marketing is highly visible, all pervasive and a very important activity
having great influence on society. There might be situations where
marketer’s action may be seen to be harming the interest of society. This
calls for a carefully designed legislature ‘that may protect the interest of
society and right of individuals against any sort of wilful or otherwise
exploitation by marketing. This also called for education and awareness of
consumer so as to safeguard against any harm. There have been various
18
movements on the part of society to safeguard its interest which is known
as consumerism.
Consumerism can be defined as “an organised social movement to
enhance the right and powers of buyers in relation to sellers”.
A consumer can call for several rights like
(i)
The right to safety: to be protected against the marketing of
goods which are hazardous.
(ii)
The right to be informed: to be protected against misleading
information
on
advertisements
and
other
promotional
campaign by the marketer.
(iii)
The right to influence products and marketing practices in
ways that buyers think will help improve the quality of life.
(iv)
The right to be heard: to be assured that consumer interest
will receive full and sympathetic consideration in the
formulation of government policy.
(v)
The right to legal remedies in case of any injustice being done
to consumer.
14.4.1
Consumer Protection Act
In India CPA safeguards the rights of consumer and provides the
remedies. A number of important changes such as checking of unfair trade
practices, grant of interim injunction and grant of compensation were
enacted in the 1984 Amendment of the Monopolies and Restrictive Trade
Practices Act, 1969 (MRTP Act) however, to make it more effective and
useful, nothing of much importance and use could come out of this
exercise. Absence of time-bound disposal of cases, court-like proceedings
of the MRTP commission’s work, centralisation of MRTP Commission in
Delhi, etc., continued to act as limitations of MRTP Act. Consequently, it
was felt necessary to enact a more comprehensive legislation to protect the
19
consumers’ rights and the speedy, simple and inexpensive redressal of
consumer disputes. In this background, the Consumer Protection Act,
1986 was introduced aiming at protection of the interests of consumers as
stated in the preamble of the Act. It provides for the establishment of
consumer councils and other authorities for the settlement of consumers’
disputes.
In order to protect the consumers from the unfair trade practices,
the Union Government of India has enacted various legislations. But due
to lack of proper co-ordination and integration among these legislations, it
is observed that consumers are not fully and properly protected. Very
prominently, this is because of poor and inadequate implementing
machinery of the government, and rampant corruption and dishonesty.
A silver line was traced in the era of consumer protection during
1986 as it was the year of dawning of visible and tangible consumer
movement in India. It was the year when the Consumer Protection Act
came into force. It really provided a boost to the existing consumer
protection activities in the country.
14.4.2 Scope of the Consumer Protection Act, 1986
(COPRA, 1986)
The Consumer Protection Act, 1986 extends to the whole of India
except the State of Jammu and Kashmir. The provisions of the Act are in
addition to, and not in derogation of, the provisions of any other law for the
time being in force. This Act applies to all types of goods and services
unless specifically exempted by the central government by notification. The
Act provides for setting-up of Consumer Protection Councils at Central and
State levels and Consumers’ Complaints Redressal Agencies at Central,
State and District levels of the country wherein states include union
territories also.
20
14.4.3
Consumer Protection Council
The central government is empowered to constitute the Central
Consumer Protection Council which consists of the following 150
members, viz.
(i)
The Minister in-charge of Department of Civil Supplies who
shall be the chairman of the Central Council;
(ii)
The Minister of State (where he is not holding independent
charge) or Deputy Minister in the Department of Civil Supplies
who shall be, the vice-chairman of the Central Council;
(iii)
The Minister of Food and Civil Supplies of Minister in-charge
of consumer affairs in states;
(iv)
Eight members of/Parliament, five from the Lok Sabha and
three from the Rajya Sabha;
(v)
The Commissioner from scheduled’<castes and scheduled
tribes;
(vi)
Representatives of the Central Government Department,
autonomous organisation concerned with consumer interest
not exceeding twenty;
(vii)
Representatives
or
of
the
consumer
organisations
consumers, not less than thirty-five;
(viii) Representatives of women not less than ten;
(ix)
Representatives
of
farmers,
trade
and
industries,
not
exceeding twenty;
(x)
Persons capable of representing consumer interest not
specified above, not exceeding fifteen; and
(xi)
The Secretary in the Department of Civil Supplies shall be the
member secretary of the Central Council.
The term of the council shall be of three years. The council may meet
as and when necessary, but not less than three meetings of the council
21
shall be held, every year. Each meeting of the council shall be called by
giving not less than 10 days notices in writing to every member, specifying
the time, place and agenda of the meeting. However, no proceedings of the
councils shall be invalid merely by reasons of existence of any vacancy in
or defect in the constitution of the council.
The council is empowered to constitute, from amongst its members,
such working groups as it may seem necessary. Every working group so
constituted shall perform such functions as are assigned to it by the
central council. It seems that such working groups may prove to be more
useful and effective in dealing with the specific problems allocated to them.
The findings of such working groups are required to be placed before the
council for its consideration. The resolutions by the council shall be
recommendation in nature.
14.4.4
Objectives of the Central Council
The COPRA, 1986 provides that the objectives of the Central Council
shall be to promote and protect the rights of the consumers, such as:
(i)
The right to be protected against marketing of goods which are
hazardous to life and property;
(ii)
The right to be informed about the quality, quantity, potency,
purity, standard and prices of goods so as to protect the
consumer against unfair trade practices;
(iii)
The right to be assured, wherever possible, access to a variety
of goods at competitive prices;
(iv)
The right to be heard and to be assured that consumer
interests will receive due consideration at appropriate fora;
(v)
The right to seek redressal against unfair trade practices or
unscrupulous exploitation of consumers; and (vi) The right to
consumer education.
22
The central council may have a significant role in the formulation of
the Central Government’s Economic Policy. In addition, it may respond to
request for information and advice on particular issues relating to the
protection of consumers. Though the decisions of the council are
recommendation, they have a significant impact on several authorities
concerned with the matters of consumer protection.
14.4.5
State Consumer Protection Councils
The state governments are also empowered to establish Consumer
Protection Councils for their respective states. The State Councils shall
consist of such members as may be notified by the state governments by
notification from time to time. The objectives of every State Council (like
Central Council) shall be to promote and protect within the state, the rights
of the consumers as laid down in its clauses (a to b) of Section 6. So far,
22 states and Union Territories have set up the consumer Protection
Councils under the Act. How far these councils have been successful in
protecting the consumer interest is not free from doubt.
14.4.6
Consumer Disputes Redressal Agencies
The Consumer Protection Act, 1986 provides for the establishment
of
a
three-tier
quasi-judicial
machinery
for
redressing
consumer
grievances. They are: (a) District Forum, (b) State Commission, and (c)
National Commission.
(a) District Forum: A Consumer Disputes Redressal Forum to be
known as the District Forum is required to be established by the state
government with the prior approval of the central government in each
district of the state.
Composition of the District Forum: The Act provides that each district
forum shall consist of a president, who is required to be or qualified to be
a district Judge nominated by the state government. It shall consist of two
23
members, among them one should be a lady social worker. The members
may hold the office for a period of five years of up to the age of 65 years
whichever is earlier and they are not eligible for reappointment. Vacancy
occurred by members resignation may be filled by the state government
and it has entire authority about deciding salary or honorarium to be paid
to the members.
Jurisdiction of the District Forum: district Forum has the jurisdiction
to entertain the complaints where the value of the goods or services or
compensation claimed is less than Rs. 5,00,0000 (earlier it was Rs.
1,00,000). It can take the complaints where opposite party/parties
reside/s or carries on business in the district and the cause of action”,
wholly or in part, arises.
Procedure to be followed by the District Forum: Section 13 of the
COPRA, 1986 lays down the procedure to be followed for the settlement of
consumer dispute by the District Forum. After receiving a complaint from
the complainant, it refers a copy of the complaint to the opposite party
directing him to give his version within 30 days or such extended period
not exceeding 15 days. If the opposite party denies or disputes the
allegations contained in the complaint or “omits or fails to take any action
to represent his case within the time given by the District Forum, then the
forum shall take the following if the complaint relates to goods. If complaint
alleges a defect in the goods which cannot be determined by proper
analysis, then the District Forum shall take a sample and send it to a
laboratory with prescribed fee (from the complainant) and then it has to
send a copy of the laboratory report to the opposite party of the
complainant disputes with the correctness of report of the laboratory, then
they may submit in writing their objections and then the District Forum
gives a reasonable opportunity to the parties of being heard and issue an
appropriate order.
24
If the complaint relates to service and where the opposite party on
receipt of a copy of the complaint denies or disputes the allegations
contained in the complaint, or omits or fails to take any- action to represent
his case within the time given by the Forum, the Forum shall proceed to
settle the consumer dispute on the basis of:
•
Evidence brought to its notice by the complainant and the
opposite party denies or disputes the allegations contained in
the complaint, or
•
Evidence brought to its notice by the complainant where the
opposite party omits or fails to take any action to represent his
case within the time given by the Forum.
If the District Forum is satisfied that the goods complained against
any of the defects specified in the complaint or that any of the allegations
contained in the complaint about the services are proved, it shall issue an
order to the opposite party directing him to take one or more of the
following things:
•
to remove the defect pointed out by the appropriate
laboratory from the goods in question;
•
to replace the goods with new goods of similar description
which shall be free from any defect;
•
to return to the complainant the price, or as the case may be
the charges paid by the complainant; and
•
to pay such amount as may be awarded by it as compensation
to the consumer for any loss or injury suffered by the
consumer due to the negligence of the opposite party.
The person (whether complainant or opposite party) dissatisfied with
the order made by the District Forum may prefer an appeal against such
order to the State commission within a period of 30 days from the date of
order.
25
(c)
State Commission: The state commission is the consumer
disputes redressal agency at the state level which is established by the
state government with the prior approval of the central government It
consists of a president who is or has been a Judge of a High Court and two
members- one of them is a woman.
Jurisdiction of the State Commission: The State Commission can
entertain the complaints where the value of the goods and compensation if
any, claimed exceeds Rs. 5,00,000 but does not exceed Rs. 20,00,000
(earlier it was Rs. 1,00,000 and Rs. 10,000,000 respectively). It can
entertain appeals against the orders of any District Forum within the state
and it can call for the records and pass appropriate order in any consumer
dispute which is pending before or has been decided by any District Forum
within the state, where it appears to the Stet Commission that such District
Forum has exercised a jurisdiction not vested in it by Law or has failed to
exercise a jurisdiction legally or with material irregularity. Hence, the
jurisdiction of the State Commission is original as well as appellate.
Procedure: While disposing of the complaints, State Commission
have to follow the Sections 12,13 and 14 and the rules made there under
with such modifications as may necessarily be applicable to it. The Rule
10 of the Consumer Protection Act is vested to the District Forum regarding
the production documents, search and seizure. It may, however, be noted
that the. State Governments have yet to make their own rules in exercise
of their powers under Section 30 (2) of the Act. It is submitted that the
State Government may adopt the similar rules as laid down by the central
government, viz., Consumer Protection Rules, 1987. It will help in
maintaining uniformity in law all over the country.
Appeal against the Orders of the State Commission: Section 19 of the
Act provides that the person aggrieved by an order made by the State
Commission on a complaint may prefer an appeal against such order to
the National Commission within a period of 30 days from the date of the
26
order. The National Commission may entertain an appeal after the expiry
of the said period of 30 days if it is within that period.
It may be noted that an order made by the State Commission on an
appeal against the orders of the District forum is not appealable to the
National Commission. Thus, provision exists only for a single appeal to the
State Commission, from the order of the State Commission to the National
Commission.
(c) National Commission: This is the highest authority to settle the
consumer disputes under the Act. It is an independent statutory body.
Composition of the National Commission: The National Commission
shall consist of a president appointed by the central government who is or
has been a Judge of Supreme Court and four other members who are
eminent in any field of knowledge- one of whom should be a woman.
However, no sitting judge of the Supreme Court shall be appointed under
the aforesaid provisions .except after consultant on with the Chief Justice
of India. The COPRA and the Rules have laid down many provisions to
rescue the independence of National Commission. The terms and
conditions of the service to the president and the members should be varied
to their disadvantage.
Jurisdiction of the National Commission: Jurisdiction of National
Commission is original as well as appellate. The original jurisdiction is
limited to the complaints where the value of the goods or service and
compensation exceeds Rs. 20,00,00 (earlier, it was Rs. 10,0000,000). The
appellate jurisdiction is confined to appeal against the orders of any State
Commission. Further, the commission is empowered to call for records and
pass appropriate orders in any consumer dispute where it appears that the
State Commission has acted illegally or with material irregularity or
exceeded its jurisdiction or has exercised its jurisdiction.
27
Procedure: The procedure to be followed ion dealing with the
complaints is specified by Section 22 of the COPRA which is similar to the
powers of a civil court. It may also follow the procedure which is prescribed
by the central government. Accordingly, the procedure has been laid down
in the Rule 14 of the consumer Protection Rules. These rules provide that
a compliant containing the following particulars should be presented by
the complainant in person or by his agent to the National Commission or
be sent by registered post to the Commission:
•
the name, description and address of the complainant;
•
the name, description and address of the opposite party or
parties;
•
the facts relating to the complaint and when and where it
arose;
•
documents in support of the allegations contained in the
complaint, and
•
the relief which the complainant claims.
On receipt of a complaint, the National Commission has to· follow
the same procedure as is to be followed by the District Forum under
Section 13 of the Act. The procedure to be flowered by the National
Commission for hearing the appeal has been prescribed in Rule 15.
Accordingly, a memorandum should be presented by the appellant or his
agent to the National Commission in person or by post addressed to the
commission. The memorandum must be set forth on the grounds of appeal
without any arguments or narrative and must be accompanied by a
certified copy of the order of the State Commission appealed against and
such of the documents as may be received to support grounds of objection
mentioned in the memorandum. However, under Section 19 of the Act, the
appeal is to be preferred within a period of 30 days from the date of the
order of the State Commission. When such an appeal is presented after the
expiry of the period of limitation, the memorandum must also be
accompanied by an application supported by an affidavit setting forth the
28
facts on which the appellant relies to satisfy the National Commission that
he has sufficient cause for not preferring the appeal within the period of
limitation.
It is obligatory for the parties or agents to appear before National
Commission on the date of hearing or any other day to which hearing may
be adjourned. If the appellant/respondent or his agent fails to appear on
such date, the commission may in its discretion either dismiss the appeal
or decide expert on merits.
Appeal against the order of the National Commission: A person
dissatisfied with the order made by the National Commission may prefer
an appeal against such order to the Supreme Court within a period of 30
days from the date of the order made by the National Commission and on
an appeal preferred from the orders of the State Commission shall be final
and no further appeal against such orders should be preferred to the
Supreme Court.
14.5 SUMMARY
It is imperative for marketing students to understand the new
emerging issues in the field of marketing like globalisation, consumerism,
green marketing, etc. There are multiplicity of factors that have led to
globalisation such as saturating markets in developed economies,
interconnectivity and new world order under WTO. Under changed
circumstances where whole world will be one economy, the companies
need a fresh thinking as how to operative and complete in new world. There
are four important modes of entering foreign markets-exporting, licensing,
joint venture and direct investment. As society has become more concerned
with the natural environment, businesses have begun to modify their
behaviour in an attempt to address society’s new concern. Few academic
disciplines have integrated green issues into their literature. This is true in
the case of business management in general and marketing in particular.
29
Green marketing incorporates a broad range of activities, including
product modification, changes to production process, packaging changes,
as well as modifying advertising. Marketing is highly visible, all pervasive
and a very important activity- having great influence on society. There have
been various movements on the part of society to safeguard the interest of
consumers, which is known as consumerism. In India Consumer
Protection Act (CPA) safeguards the rights of consumer and provides the
remedies. The consumer protection Act, 1986 extends to the whole of India
except the state of J & K. The Act applies to all types of goods and services
unless specifically exempted by the central government by notification. The
Act provides for setting up Consumer Protection Councils at Central and
state levels and consumer’s complaints Redressal Agencies at Central,
State and District levels of the country.
14.6 KEYWORDS
Globalisation: It is a trade philosophy where business people treats
that the entire world is a market and I am one of the players.
Licensing: It provides a way of selling the rights to a patent, brand
name, or expertise so that the licensee can produce or market the product
in a foreign country.
Joint venture: It involves a shared ownership between a local and a
foreign company.
FDI (Foreign Direct Investment): It is the situation in which a
foreign company directly invest in a business venture.
Green marketing: Green marketing consists of all activities
designed to generate and facilitate any exchanges intended to satisfy
human needs or wants, such that the satisfaction of those needs and wants
occurs, with minimal detrimental impact on the natural environment.
30
Consumerism: An organised social movement to enhance the rights
and powers of buyers in relation to sellers.
14.7 SELF ASSESSMENT QUESTIONS
1.
What are new emerging issues in marketing? Discuss in brief
any two of them with suitable examples.
2.
Explain the concept of green marketing. Also write in brief why
companies follow this concept and what are the major
problems faced by them.
3.
What is globalisation? Discuss in brief stages of international
marketing involvement. Also write in brief the important
modes of entering foreign markets.
4.
What do you understand by Consumer Protection Council?
Explain the role and functions of it.
5.
Write a detailed note on consumer dispute redressal agencies
and also mention their main functions.
14.8 REFERENCES/SUGGESTED READINGS
1.
International Marketing— Cateora (TMH)
2.
Principles of Marketing— Kotler and Armstrong (PHI)
3.
Fundamentals of Marketing— Stanton (TMH)
4.
Marketing Management— Kotler (PHI)
5.
Business Environment— A.K. Ashwathapa (HPH)
6.
Greener Marketing— Charter Martin (Green Leaf Publishing,
England)
7.
Environmental Marketing— Coddington Walter (MCGraw-Hill
Inc., NY)
31